The new illegal Phoenixing Legislation effecting Director Resignations

Mar 9, 2021

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Phoenixing Act) was enacted last month to assist ASIC and liquidators to combat illegal phoenixing activity in Australia. The Phoenixing Act amends the Corporations Act 2001, A New Tax System (Goods and Services Tax) Act 1999 and Taxation Administration Act 1953 to place tighter restrictions upon company directors and other professional advisors, and provides ASIC with broader powers to make orders in relation to illegal phoenixing.

What is Illegal Phoenixing?

Illegal Phoenixing occurs when a new company is established to conduct the business of an existing company, which has been deliberately liquidated to avoid paying outstanding liabilities. Illegal Phoenixing often involves:

  • a company selling all of its assets to a new company at a reduced price;
  • after the assets have been sold to the new company, the original company is liquidated;
  • the business of the original company is then continued under the new company.

This practice prevents creditors from accessing the assets of the original company to recover unpaid debts.

Key Changes – Director Resignations and Removal by Members

The Phoenixing Act has introduced significant changes to the way that director’s resignations and removals are affected. These changes are relevant to all company directors, and not just those who may be participating in illegal phoenixing activity.

As of 18 February 2021, any notification of the resignation of a director that is submitted to ASIC more than 28 days after the date that the director resigned will only take effect from the date that written notice is lodged with ASIC. The purpose of this change is to prohibit outgoing directors from backdating their resignations in an attempt to avoid accountability for their decisions while serving as a director of a company.

In addition, unless a specific exception applies, directors will no longer be able to resign as a director if they are, at that time, the only remaining director of a company according to ASIC’s records. Importantly, this will prevent the forced removal of a director by the members of a company, if the removal will result in the company being without a director. The purpose of this change is to strengthen the already existing requirement (as outlined in the Corporations Act) that companies must at all times have at least one director.

The Upshot

Company directors intending to resign from their role as an officer of a company must ensure that the appropriate notification forms are lodged with ASIC in accordance with the new timing requirements.

If the required forms are lodged with ASIC outside of the 28-day timeframe, the relevant director (or the company) will be required to submit an application to ASIC or the Court to request that the resignation take effect from an earlier date (depending on the timing of such application).

If you need advice or assistance to regarding the Phoenixing Act or the Corporations Act more broadly, the KKI Commercial Team is here to help.