Directors beware - Illegal Phoenixing

Illegal phoenixing generally involves stripping a financially stricken company of its assets and transferring those to a new company to avoid paying creditors of the old company.

Between the 1980s and the early 2000s, several Government inquiries examined the phoenixing process.  On 18 February 2020, the Federal Government introduced a raft of new laws known as the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (the Act) to combat the practice. After a twelve month transitional period, these rules will apply to directors who resign from office on or after 18 February 2021:

  1. A director has 28 days from the date of resignation to notify ASIC. If the notice of the resignation is lodged more than 28 days after the person ceased to be a director, the resignation date will be deemed to be the date on which the written notice is lodged with ASIC and not the actual date of resignation.  An application can be made to either ASIC or the Court to determine an alternative resignation date, but such an application must be within 56 days of the actual resignation if made to ASIC and within 12 months if made to the Court.  Application and late notification fees will apply. Expect any such applications to be closely reviewed.  The intent is to stop directors back-dating resignations to avoid payments to creditors.

 

  1. If the effect of the director’s resignation is that the company would have no directors left at the end of the resignation day, then the resignation will not be capable of taking effect. Equally, if the shareholders of a proprietary company resolve to remove the last standing director of the company, leaving it with no directors, then the resolution will be void.  ASIC will reject notices of resignation or removal of directors (i.e. ASIC Forms 484 and 370) if an alternative director is not appointed on the same day.  The same will apply to multiple directors resigning on the same day if the effect of the multiple resignations is that the company will be left without any remaining directors.  If that is the case, then all the resignations will be ineffective unless another director is appointed at the end of the day of the mass resignations.


Form 484 allows a company to notify ASIC that a director has resigned.

Form 370 enables the exiting director to provide ASIC with the requisite notice directly, avoiding reliance on the company to do so in a timely manner.  A corporate key is not required for the lodgment of Form 370.

There are some limited exceptions to this rule that the last remaining director cannot cease office without a replacement including:

the death of the last director,

if the company has commenced winding up or

the director in question did not consent to the appointment in the first place.

These new rules are only one part of the wide-ranging changes introduced by the Act.  Other changes, which have already taken effect, include the ability in some circumstances to set aside dispositions of assets which have the effect of defeating creditors (creditor defeating dispositions) and to make directors personally liable for GST. 

Despite the above changes aimed at combatting illegal phoenixing, legitimate restructuring still gives company directors options when trying to deal with financial problems.  For example, the safe harbour provisions were introduced into the Corporations Act 2001 in September 2017.  These provide protection from insolvent trading for directors legitimately trying to rescue a struggling business, if directors take reasonable action which is likely to lead to a better outcome for the struggling company and its creditors than would be achievable by an appointment of a liquidator or administrator.

As always, it is imperative that directors act quickly and seek advice early.

For more information or options for directors of struggling companies, please contact us for help.

*This article is intended to be general commentary only and should not be taken as legal advice. Before taking action, ensure you obtain legal advice in relation to your specific circumstances.

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