Recent Resignation Requirements for Directors12 March 2022 in Business Law
Directors of companies need to comply with recent resignation requirements under the Corporation Act 2001 (Cth). Compliance with these requirements is in the interest of both directors and creditors and stakeholders of the company.
Australia’s Corporation Act 2001 (Cth) provides that directors must comply with various requirements when resigning. These requirements were introduced under the Treasury Laws Amendment (Combatting Illegal Phoenxing Activity) Act 2020 (Cth). These resignations came into force on the 18th of February 2021 and were created for the purpose addressing illegal phoenix activity.
Illegal phoenix activity refers to when an existing company transfers its current business and assets to a new company to avoid paying creditors, taxes and employee entitlements. This is because when the existing company enters liquidation there are no assets for the liquidator to recover to pay the creditors. A company may engage in illegal phoenix activity if they are facing liquidation or experiencing financial hardship. There are significant criminal and civil penalties for engaging in illegal phoenix activity.
The resignation requirements under the Corporations Act 2001 (Cth) limit the ability for directors to engage with illegal phoenix activity or escape liability for breach of their director duties. Key aspects of these requirements are summarised below:
Effective Date of Director Resignation
The date on which a director’s resignation takes effect depends on when the director notifies ASIC. Where an individual ceases to be a director and notifies ASIC of this within 28 days, the effective date of resignation will be considered the date on which the individual stopped being a director. Where an individual stops being a director and fails to notify ASIC within 28 days, the effective date of the resignation will be the date on which the notice of resignation is lodged with ASIC.
Directors should keep in mind that they retain liability for their duties as directors until their resignation takes effect. As such, resigning directors who fail to comply with the ASIC notification requirements when resigning, may be deemed responsible for conduct and matters that take place after the date they stopped being a director.
Fixing the Resignation Date
Directors can apply to ASIC of the Court to “fix” the date of effective resignation if they have failed to comply with the ASIC notification requirements. By fixing the date of effective resignation, the date of effective resignation will become the date upon which the individual actually stopped being a director.
Directors applying to fix a dated of effective resignation must satisfy either ASIC or the Court that they stopped being a director on the date they wish to make the effective resignation. The Court can only fix a date if they are satisfied that it is just and equitable to do so. ASIC can only fix a date of effective resignation if they have considered the director’s “conduct, act, omission and representations in relation to notifying ASIC of the resignation”. In addition, ASIC must consider any reasons why the director was delayed in notifying ASIC of their resignation.
Directors should be aware that there are different time limits which apply to the availability of applications to fix the effective date of resignation. Further, if an effective date of resignation is fixed by the Court, the applicant will need to promptly notify ASIC of the orders or they risk being liable of an offence.
Limits on Resignation
Directors should be aware that a resignation will not be effective if there are no other directors of the company. An exception to this rule exists where a director’s resignation appropriately coincides with the winding up of the company.
These limits placed on director resignation are an effective means to protect companies from being abandoned by its directors. Additionally, the fact a company cannot be left without directors provides a degree of assurance to company creditors and stakeholders that directors will not abandon their responsibilities.
How can BSM Lawyers Help me?
The business lawyers at Brander Smith McKnight have over 40 combined years of experience and remain up to date with all current legislation regarding directors duties, including resignation requirements. We are happy to explain how this legislation impacts on your individual situation.
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