The Australian Government recently announced changes to the Corporations Act 2001 (Cth). These amendments focus on the practice of illegal phoenixing and highlight the need for companies to comply with minimum director requirements.
What is illegal phoenixing?
Illegal phoenixing occurs when a new company is created to continue the business of a company which has been deliberately liquidated in order to avoid paying its debts, including employee entitlements, creditors and taxes. The assets of the old company are transferred to the new company and the directors continue to operate the business. This gives the new company an unfair advantage in the marketplace when competing for work, because the company carries less debt and has lower operating costs than its competitors. Illegal phoenix activity results in old debts and unpaid creditors and poses substantial risks to revenue and the integrity of the corporate system. You can read more about phoenix companies here.
Recent government amendments, such as the introduction of Director Identification Numbers, are designed to help thwart the practice of illegal phoenixing by allowing for better traceability and accountability of directors. You can read more about the government’s Director ID regime here.
In February 2020, the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth) introduced a raft of new measures to target illegal phoenixing. This included improving director accountability, introducing new criminal and civil penalties and granting new powers to the Australian Securities and Investments Commission (ASIC). Among the measures were amendments designed to prevent the improper backdating of director resignations and ensure companies are not left without directors, the purpose of which would be to avoid liability or prosecution. The commencement of these measures was initially deferred but came into force on 18 February 2021.
What has changed?
From 18 February 2021, companies can no longer cease the last director of the company. Rather, a director’s resignation will now take effect on:
- the date that the person ceased to be a director, if ASIC receives notification of the resignation within 28 days of it occurring
- the date the notification is received by ASIC, if ASIC receives notification of the director’s resignation more than 28 days after it occurred, or
- if the resignation of that particular director will leave the company without a director, it will not take effect.
So, for example, if a director resigns on 1 March 2021, but fails to notify ASIC until 1 August 2021, then the director’s resignation date will be recorded on the AISC register as 1 August 2021.
A similar restriction applies if attempts are made to remove a director by a resolution of members; such resolutions will be deemed void. The changes also apply to alternate directors.
If the last remaining director is deceased or lacks mental capacity to fulfil their legal obligations as director, and was also the sole member of the company, a trustee or representative of the director’s estate will need to contact ASIC.
Exceptions to these new measures exist if the company is being wound up or is under external administration.
What this means for company directors?
The amendments mean that if a company or a director fails to promptly notify ASIC of their resignation as a director, they may be deemed to have continued as a director beyond the date of their resignation. The changes are designed to prevent directors from improperly backdating their resignation in order to avoid liability for events which occur after their deemed departure.
Company directors should note the following practical steps:
- Companies should ensure that they notify ASIC promptly of any changes to company details, including the resignation of directors.
- Outgoing directors should ensure that the company properly lodges a notice of their resignation with ASIC within the required timeframe.
- Incoming directors, as part of their due diligence process on the company, should query the circumstances surrounding the departure of any former directors.
- Non-executive directors, in particular, should note that the last remaining director of a company cannot validly resign, or be removed, without a replacement director being appointed.
Sources: ASIC, Your company and the law: Illegal phoenixing reforms, 18 February 2021, accessed 29 March 2021.
Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth), accessed 29 March 2021.
ASIC, Illegal phoenix activity, accessed 29 March 2021.
ASIC, ASIC action on illegal phoenix activity, accessed 29 March 2021.
ASIC, Resigning or removing a company director, accessed 29 March 2021.
CCH Pinpoint, Phoenix Companies, 30 April 2020, accessed 29 March 2021.
CCH Pinpoint, Treasury consults on new Director ID regime, 16 March 2021, accessed 29 March 2021.