New amendments to the Corporations Act targeting illegal ‘phoenixing’ came into effect on 18 February 2021. The changes will prevent Directors from improperly backdating their resignation or leaving their company with no Directors. While the legislation intends to capture people trying to subvert the law, it can have severe implications on small companies’ Director disputes.

What is Illegal ‘Phoenixing’?

Illegal ‘phoenixing’ occurs when an existing company’s Directors transfer their assets to a new company at below market value. Once the assets have been transferred, the existing company is liquidated, leaving no assets to pay off creditors while the Directors resign and begin directing the new company.

How to resign as a Director?

Follow your company’s constitution to know how to resign as a Director. Generally, you must provide written notice to the company (at their registered office). The company must then update ASIC to reflect the change in directorship within 28 days of the resignation. You may also notify ASIC of your resignation by providing a copy of the resignation letter you gave to the company.

When will a resignation be accepted by ASIC?

Resignation date

From 18 February, ASIC will accept your resignation at the date you make it only if you update ASIC within 28 days. For example, If I resign as Director on 1 March and notify ASIC on 19 March, they will accept my resignation on 1 March.

Before 18 February, if you were to submit the 1 March resignation after 28 days, for example, on 3 April, you would incur late fees. You will incur late fees, and your resignation will only be effective from the date you notify ASIC being 3 April. If you update ASIC later than 28 days but less than 56 from the resignation date, you may submit form 502 with reasons for the delay and pay a fee. If this form is accepted, the resignation date will remain as 1 March. However, if you miss the 56 day cut off, your only option to backdate resignation is to apply for a court order.

This is important because you also remove most liability you have as a Director when you resign as Director. Suppose you are in a Director’s dispute over the company’s mismanagement, and your resignation only becomes effective several months later when you update ASIC. In that case, you can be held liable for the company’s actions during that time, even if you sent your resignation to the company before the incident you are liable for occurs.

Remaining Directors

ASIC will not accept your resignation if it leaves the company with no more Directors. If you try to cease the last Director, your application will be rejected. This is particularly important in small companies. It could result in a kind of corporate musical chairs where the previous Director left standing is left with the company’s liability and the consequences of the retired Director’s actions.

GST and Directors

Directors may be liable to pay the company’s GST if the company does not.

Moving assets

The other significant change the new legislation introduces it the idea of a “creditor-defeating disposition”. This will occur when a company disposes of property at less than market value to prevent or hinder the asset from being available to meet the company’s creditors’ demands. It will now be a criminal offence for an officer of a company to engage in a creditor-defeating disposition if the company is insolvent or becomes insolvent as a result of the disposal or if within 12 months of the disposal, the company ceases to trade or goes into external administration.

ASIC will also have the ability to direct the asset (or equivalent amount) that was transferred during a creditor-defeating disposition to be returned to the original company.

Conclusion

If you resign as Director, immediately notify ASIC of your resignation to avoid the risks associated with the delayed notification. Further, it will be good practice as an incoming Director to question why previous Directors departed. If you are thinking of becoming a Director or you are experiencing a Director’s dispute, talk to your lawyer to reduce your risks of being held liable.

 

***Assisted by; Jacqueline Healy***

 

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