Explanatory Memorandum
(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon. Michael Sukkar MP)Chapter 3 Improving the accountability of resigning directors
Outline of chapter
3.1 Schedule 2 to the Bill ensures directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors. This will reduce the incidence of illegal phoenix activity and its effect on employees, creditors and government revenue.
Context of amendments
3.2 Divisions 1 and 3 of Part 2D.3 of the Corporations Act 2001 regulate the appointment and removal of directors. These provisions also contain replaceable rules that may be replaced by provisions of a company's constitution (section 135).
3.3 A proprietary company must have one Australian-resident director over the age of 18 (sections 201A and 201B). A company may generally appoint a person as a director by a resolution passed in a general meeting (replaceable rule section 201G).
3.4 A director may unilaterally resign in writing (replaceable rule section 203A). A company may also remove a director through a resolution (replaceable rule section 203C for proprietary companies).
3.5 A director may also be removed by a resolution of members (section 203D in the case of public companies and replaceable rule section 203C in the case of proprietary companies).
3.6 Under subsection 205B(5), a company must notify ASIC within 28 days if a person is appointed as a director or stops being a director. The company's obligation to notify ASIC of a director's resignation may be satisfied by the resigning director notifying ASIC themselves (section 205A and paragraph 205B(6)(b)).
3.7 Contraventions of the reporting obligation in subsection 205B(5) are governed by the general penalty provisions in Division 2 of Part 9.4, the penalties in Schedule 3 (relevantly 60 penalty units or imprisonment for 1 year, or both) and Chapter 2 of the Criminal Code .
3.8 Although the company is under the obligation to comply with subsection 205B(5), directors or a company secretary (as appropriate) are vicariously liable for a contravention (section 188). Contravention of section 188 is a civil penalty provision under section 1317E and is subject to penalties of up to $3,000.
3.9 In addition, subsection 1308(2) makes it an offence to supply false or misleading information to ASIC.
Implications for illegal phoenix activity
3.10 Company directors engaging in illegal phoenix activity have opportunities to exploit deficiencies in these laws to obscure their role in company decisions and to shift accountability to other directors. In egregious cases, a phoenix operator may seek to shift accountability to a 'straw director' who has no real involvement in the company, may have little or no knowledge of their appointment and is often of limited financial means, frustrating recovery and enforcement efforts. 'Straw directors' may also be deceased persons or entirely fictitious.
3.11 The lodgement of a notice with ASIC that a director has resigned by necessity occurs after the fact, and a discrepancy can arise where a director alleges that a resignation notice was provided to the company, but the company has not communicated this to ASIC.
3.12 A former director may also cause the company to backdate the effective date of their resignation to implicate a new director in offending conduct.
3.13 Finally, in some instances, a company director may abandon a company by resigning without another director in place to provide oversight of the company. The abandoned company is unable to notify ASIC of the resignation or appoint a replacement director, and may continue to be registered for some time with unpaid debts before creditors or ASIC take steps to wind it up.
Summary of new law
3.14 Schedule 2 to the Bill prevents the backdating of resignation in breach of the 28-day rule in section 205B unless ASIC or the Court is satisfied the change took place on the purported date.
3.15 Abandonment of companies by a resigning director or directors, leaving the company without a natural person's oversight, is also prevented.
Comparison of key features of new law and current law
| New law | Current law |
| If the resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation takes effect from the day it is reported to ASIC.
A company or a director may apply to ASIC or the Court to give effect to the resignation notwithstanding the delay in reporting the change to ASIC. |
Directors may resign at any time in writing, subject to the company's constitution.
The company (or the former director) must notify ASIC within 28 days of the resignation. |
| A director may not resign from a company if doing so would leave the company without a director (unless the company is being wound up). | |
| A director may not be removed by a resolution of members of a proprietary company if doing so would leave the company without a director (unless the company is being wound up). | A director may be removed by a resolution of company members, subject to a proprietary company's constitution. |
Detailed explanation of new law
Preventing inappropriate backdating of director resignations
3.16 If a resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation takes effect from the day it is reported to ASIC. [Schedule 2, item 2, subsection 203AA(1) of the Corporations Act 2001]
3.17 This amendment also applies to alternative directors who resign prior to the end of their term of appointment. [Schedule 2, item 2, Note 1 to subsection 203AA(1) of the Corporations Act 2001]
Example 3.1 Inappropriate backdating of director resignations
Bill is the sole director of Panorama Designs Pty Ltd, a building company that is insolvent. On 10 July 2019, Panorama Designs borrows $50,000 it claims is for the purpose of finalising the construction of a small apartment complex.
On 15 July, Panorama Designs transfers the $50,000 and other assets to another company, Panorama Designs (No. 2) Pty Ltd, of which Bill is also a director.
On 20 October 2019, the creditors of Panorama Designs commence proceedings to have a liquidator appointed to the company.
On 1 November 2019, Panorama Designs lodges a notice with ASIC that Bill resigned from the company and was replaced by Theo on 1 July 2019. Bill claims that he should not be held accountable for the misconduct that occurred in July 2019 as he was not a director.
However, Bill's resignation is taken to be effective from 1 November 2019. Bill can be prosecuted for breaching his duty as a director to prevent the company from trading while insolvent and for causing the company to make a creditor-defeating disposition.
Applications to ASIC and the Court
3.18 Either the former director or the company may apply to ASIC or the Court to backdate a resignation that is lodged after the 28-day period. The applicant must satisfy ASIC or the Court (as appropriate) that the director did in fact resign on the purported date. [Schedule 2, item 2, subsection 203AA(2) of the Corporations Act 2001]
3.19 If the application is made to the Court, the applicant must satisfy the Court that it is just and equitable to make the order to backdate the resignation. [Schedule 2, item 2, subsection 203AA(3) of the Corporations Act 2001]
3.20 If the application is made to ASIC, ASIC must take into account the conduct and representations of the applicant, including the reasons for the delayed notification, when determining whether to allow the resignation to be backdated. [Schedule 2, item 2, subsection 203AA(4) of the Corporations Act 2001]
3.21 If the application is made to ASIC, it must be made within 56 days of the purported date of the director's resignation. Applications to the Court can be made within 12 months of that date or at a later time allowed by the Court. [Schedule 2, item 2, subsection 203AA(5) of the Corporations Act 2001]
Example 3.2 Application to Court
Further to Example 3.1, Bill cannot apply to ASIC to backdate the effective date of his resignation because the company provided the notification to ASIC after the end of the 56-day period.
Bill applies to the Court to have the effective date of his resignation backdated. Bill cannot adduce clear evidence to substantiate his position that he resigned on 1 July 2019. ASIC responds to the application and adduces evidence that Bill was still involved in the management of the company during July 2019.
The Court refuses the application.
3.22 If the Court makes an order to backdate the effective date of a director's resignation, the applicant must provide a copy of the order to ASIC within two business days. Non-compliance is a strict liability offence subject to 120 penalty units. This is consistent with the strict liability offence for failing to notify ASIC of the resignation on time under subsection 205B(5) (as amended by the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 ). [Schedule 2, items 2 and 5, subsections 203AA(6) and (7), and Schedule 3 to the Corporations Act 2001]
3.23 If the applicant is a company, its secretary or directors may be subject to a civil penalty for a failure of the company to provide a copy of a Court order to ASIC. It is a defence if the secretary or director (as appropriate) took all reasonable steps to ensure the company provided the copy of the Court order to ASIC. [Schedule 2, item 1, paragraph 188(1)(ea) of the Corporations Act 2001]
Preventing the abandonment of companies
3.24 A director may not resign if the resignation would leave the company without a director .[Schedule 2, item 2, subsections 203AA(8) and 203AB(1) of the Corporations Act 2001]
3.25 There are often circumstances where there will be a legal impediment under a company constitution to appointing a replacement director before the outgoing director can leave office. To accommodate temporary absences of a director, the amendment applies at the end of the day on which the director purports to resign. If another director is appointed the same day as the resignation, the resignation is effective.
3.26 The end of day test also applies in situations where multiple directors resign on the same day. In this case, all the resignations will be ineffective unless at least one director is appointed to the company at the end of the day.
3.27 Similar restrictions apply to the power of a proprietary company's members to remove a director by resolution. This is necessary to address the potential for a single member proprietary company to resolve to remove the director. [Schedule 2, item 3, subsection 203CA(1) of the Corporations Act 2001]
3.28 A single director may resign or be removed if the company is being wound up at the time. Division 1A in Part 5.6 of the Corporations Act 2001 outlines the times when a winding up is taken to have begun. [Schedule 2, items 2 and 3, subsections 203AB(2) and 203CA(2) of the Corporations Act 2001]
3.29 These amendments do not prevent a sole director being removed because they are disqualified from being a director.
Application provisions
3.30 The amendments commence on the day following Royal Assent. [Item 2 of the table in subclause 2(1) of the Bill]
3.31 The amendments apply to director resignations and resolutions to remove directors taking effect on or after the day 12 months after Royal Assent. [Schedule 2, items 2, 3 and 4, subsections 1661(2) and (3), Note 2 to subsection 203AA(1), and the notes to subsections 203AB(1) and 203CA(1) of the Corporations Act 2001]