What you need to know about Australia’s new director laws

Written by AMK Law

March 19, 2021

The rules around how a company director may resign or be removed have changed, as part of a bit to minimise illegal phoenix activity in Australia.

Last year Australia introduced new laws that are focused on minimising illegal ‘phoenixing’ by privately owned companies.

Take a look at the changes, as well as the most recent updates, which impact the way company directors can vacate their position.

 

What is phoenixing?

 

If a company illegally ‘phoenixes’, the people who are operating it transfer existing assets from one entity to another. They then liquidate the company as a way to avoid paying staff, the tax office and their suppliers but set up a new business using the funds they have set aside.

This has been possible in the past because company owners and directors are not directly liable for financial losses caused by their business. There has been a gap in terms of accountability for the people involved with such behaviour.

As shared by ASIC, a report into the economic impact of potential illegal phoenix activity found that it costs employees between $31 and $298 million in unpaid entitlements and costs the government around $1,660 million in unpaid taxes and compliance.

 

Combating Illegal Phoenixing

 

In 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Act) was introduced.

The changes introduced civil penalties and criminal offences for contraventions by directors, pre-insolvency advisers and other facilitators. They also allowed company directors to be personally liable for a company’s GST liabilities (in certain circumstances).

Since last year, The Tax Commissioner has had the power to tax refunds where a taxpayer has failed to lodge a return or provide other information which may affect the amount that the Commissioner refunds. 

The changes are all aimed at limiting illegal phoenixing activity and making it easier to penalise the people who take part in this practice.

 

Director resignation changes

 

In early 2021, further reforms came into force.

As shared by ASIC, the reforms prohibit company directors from improperly backdating their resignation or leaving a company with no directors. 

From 18 February 2021 onwards, if you resign as the director of a company, ASIC will need to be notified within 28 days. Fail to do so and your resignation will be the date you lodged.

Here is an example from ASIC:

If a director resigns on 1 March 2021 and does not notify ASIC of their resignation until 1 August 2021, ASIC will record their resignation as 1 August 2021 on the corporate register. To fix an earlier date, the company or director must apply to ASIC or the court.

Read more about applying to ASIC or the court here: https://newshub.asic.gov.au/director-resignations-new-laws-apply-from-18-february-2021/.

In addition to the resignation reporting reforms, companies are also now prohibited from removing the last director on ASICs records and leaving no director.

According to ASIC, it will “reject submissions of Form 484 Change to company details or Form 370 Notification by officeholder of resignation or retirement to cease the last appointed director without replacing that appointment.” 

In other words, if you are the last Director standing, you cannot officially resign without there being a replacement for you. There are some exceptions to this, including if a director passes away.

 

Be aware of the changes

 

Few people would deny the importance of preventing companies and their directors from illegally liquidating to escape debts, or directors backdating their resignation to resolve themselves of accountability in a difficult situation. However, the new reforms impact all directors.

If you are planning to resign from your position, make sure you report this to ASIC within four weeks. Fail to do this and you could potentially be responsible for things that go on within the company, even if you’re not present.

The change also means there is no longer an acceptable time frame for your company to have no director. It is a reminder to spend time ensuring quality governance and succession planning. This will save your company from inadvertently breaching the new rules for Directors.

Want to know more about company governance, directorship or going into liquidation? Contact us

Disclaimer
The material contained in this publication is of a general nature only and it is not, nor is intended to be, legal advice. If you wish to take any action based on the content of this publication, we recommend you seek professional legal advice.

AMK Law acknowledges the Traditional Owners of the land on which we are fortunate to live and work. We pay our respects to Elders, both past and present and further acknowledge the important role that Indigenous people continue to play within our communities.

 

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