Directors beware – Corporations Act changes tighten the rules for exiting Directors.

Recent changes to the Corporations Act can prevent a director from exiting and alter the effective date of resignations. Although designed to ensnare unscrupulous operators, they may catch out many others.

Provisions regarding exiting directors under the Corporations Act 2001 (C’th) have until recently been relatively straight forward. Subject to a company’s constitution:

• a director can resign by giving written notice to the company at its registered office; and
• a company can remove a director from office by shareholder resolution.

In either scenario, ASIC must be notified within 28 days of the change – whether by the company or by the former director (if they choose to make their own notification).

Compliance has always been important. Late notification to ASIC is subject to penalties for the company (and company secretaries or directors if they cannot show that they took reasonable steps to ensure that the company complied with its obligations). However, the penalty regime has not been sufficient to prevent unscrupulous directors from backdating resignations or abandoning companies especially if seeking to evade the consequences of insolvent trading and or carry out phoenix operations.

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 has introduced new sections 203AA, 203AB and 203CC to the Corporations Act with a view to addressing such conduct.  As a result, if a director purports to exit either by resignation or removal by shareholder resolution on or after 18 February 2021:

1.  There must be at least 1 other director for that exit to be effective. This is measured as at the end of the relevant day. This means that you can still have directors resign and then later that day appoint a replacement, but if there is not at least 1 director at the end of the relevant day, the director’s resignation will not take effect and any resolution by the shareholders of a proprietary company to remove the director will be void (unless the company is being wound up).
2. If ASIC is not notified of a director’s resignation within 28 days, it will not take effect until the date that ASIC receives notification. This means that the former director will remain liable as a director during the interim period between resigning and the notification date even though they have stopped acting. (The penalty provisions will also still apply to the late lodgment.)
3. If late notification alters an effective date, having that date corrected back to the real date of resignation is a limited and onerous process. Either the former director or the company will need to apply to ASIC or the Court and satisfy it that the former director did in fact resign on the date that they purported to resign. Applications to ASIC must be made in the prescribed form within 56 days after the former director stopped acting and ASIC must have regard to any conduct, act, omission or representation of the applicant in relation to notifying ASIC of the resignation and the reasons for any delay. Applications made to the Court must be made within 12 months after the day that the former director stopped acting (or later if the Court allows) and the applicant must satisfy the Court that it is just and equitable to backdate the resignation.

Whilst these changes will no doubt assist in holding directors accountable for improperly backdating and phoenixing activity, they are also likely to catch out many others. It has never been more important to understand your obligations and to be decisive and proactive when it comes to compliance:

1. Dispute situations often involve deadlocked boards and struggling businesses. If you think you may need to leave a company’s board or take action to prevent insolvent trading, do not wait. Seek urgent advice and if you are going to leave, do not be last!
2. Many directors have traditionally relied on the company to lodge ASIC notifications. Exiting directors are now well advised to lodge themselves within 28 days. It is the best means of preventing further exposure.
3. Many companies have inadvertently missed ASIC notification deadlines.  The paperwork and costs associated with correcting such oversights alone will now impose an unwelcome burden. Notification obligations should be front of mind.  If a director has resigned or been removed on or after 18 February 2021, both the company and former director should take steps to confirm that notification occurred within 28 days. If notification has occurred late, the clock is running and urgent advice and corrective action is required.

Tisher Liner FC Law have extensive experience in corporate law and compliance. If you require any compliance advice or assistance with ASIC notifications, please contact a member of our Commercial Team.