On 18 February 2021, new laws governing director resignations came into effect.
Background to the new laws
Historically, the date on which directors reported their resignation to ASIC did not impact on when that resignation actually took effect. Directors could notify ASIC that they resigned many months or even years after the date. In such instances, creditors and third parties who relied on a company search providing that a particular person is or was a director during a particular period might subsequently discover that the particulars of the directorship had been changed and backdated by ASIC.
On occasion, backdating resignations was done by directors to frustrate enforcement of offending conduct, or to facilitate illegal phoenixing activity. The four primary scenarios were:
- shifting responsibility to other directors, particularly those with limited financial resources against whom enforcement efforts were often uneconomical;
- disputes arising between companies and former directors as to when resignations in fact took effect;
- backdating resignations to implicate new and unsuspecting directors in offending conduct; and
- sole directors abandoning companies to the detriment of creditors.
The new laws
The laws were introduced in order to:
- close off some of the periods in which directors were previously able to backdate resignations, limiting directors’ ability to frustrate enforcement of offending conduct; and
- assist ASIC and the Government combat illegal phoenixing by preventing directors from significantly backdating their resignations, or leaving companies with no directors and abandoning them entirely.
The new laws are contained within sections 203AA, 203AB and 203CA of the Corporations Act 2001 (Cth) and address two main issues:
- the effective date of director resignations when notifying ASIC; and
- what happens when a director resigns from a company that has no other directors.
Under the new provisions:
- if, within 28 days of resigning, a director advises ASIC of their resignation, the resignation takes effect from the date that they resigned (s203AA(1)(a));
- in all other cases, the resignation will take effect from the date the notice was lodged with ASIC (s203AA(1)(b)).
There are, however, a number of exceptions to the laws. For example, an application may be lodged with ASIC within 56 days of the date of resignation to fix the day that a resignation takes effect.
The Courts have similar powers and can fix the date that a resignation takes effect where it is “just and equitable” to do so (s203AA(3)). An application to the Court must be made no later than 12 months after the date of resignation, although the Court may extend the time in which an application can be made.
The new laws also make special provisions for companies where the effect of the resignation will be to leave a company with no other directors. In this instance:
- a director’s resignation does not take effect if it would leave a company without a director (s203AB(1)); and
- a members’ resolution to remove a director is void if it would leave the company without a director (s203CA(1)).
Once again, there are some exceptions to these rules, most notably that directors may resign or be removed from a company that is being wound up.
Practical effect of the new laws
From 18 February 2021:
- a director cannot backdate their resignation by more than 28 days, unless they apply to ASIC or the Courts for an exemption; and
- ASIC will reject resignations/removals that leave the company with no other director.
It is hoped that limiting the opportunity to backdate a resignation will:
- increase the accountability of directors resigning from troubled companies;
- provide better protections for employees, creditors and government revenue; and
- reduce the incidence of illegal company phoenixing activity.
Directors who had previously relied on backdating their resignations, or abandoning their companies entirely, to allow them to escape accountability will have a tougher time doing so under the new laws. However, legitimate resignations will be impacted too. Directors will need to be acutely aware of when their resignations are reported to ASIC, and may even consider reporting them themselves using ASIC Form 370.