ASIC defines illegal phoenix activity as “activity when a company is liquidated, wound up or abandoned to avoid paying its debts. A new company is then started to continue the same business activities without the debt.” In essence, the director of a company, transfers the assets of an existing company to a new company without paying the true or market value for the assets, leaving behind the debts to the old company. The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (‘Act’) seeks to curtail this activity from occurring whilst Australia is in the midst of managing a recovering economy. Unusually, the Act does not define phoenixing activity, however, attempts to limit the pathways for directors to engage in such activity.
In an attempt to curb the impending insolvency wave and the potential illegal phoenix activity which may occur, ASIC has been afforded greater powers pursuant to the Act in respect of prosecuting directors who engage in illegal phoenix activity. The amendments the Act proposes came into force in February last year however, due to the 12-month transitional period, are applicable as of 18 February 2021 under the Corporations Act 2001 (Cth) (CA). The purpose of the amendments is to defer illegal phoenix activity by:
- Enacting legislation compelling all companies to have a least one director at all times;
- Preventing directors from resigning as director leaving a company without any directors; and
- Preventing the improper backdating of resignations by directors.
The changes are contained in sections 203AA, 203AB and 203CA in the CA and will be discussed in further detail below.
Section 203AA
From 18 February 2021, the effectiveness of a director’s resignation will be dependent on when the written notice resigning is lodged with ASIC. There are two instances where resignation takes effect:
- If notice is lodged within 28 days after the day the director stopped being a director of the
company, the date of resignation is the day the person stopped being a director of the
company; or - in any other case, the day written notice is lodged with ASIC, is the date of resignation as a
director of a company.
The purpose of this section is to improve the accountability of directors who resign from companies and encourage them to notify ASIC of changes promptly after their resignation. The Court or ASIC have the power to order a correction to the resignation date, however, an application for such an order must be made to ASIC within 56 days of the actual resignation date, or within 12 months of the actual resignation date if the application is to the Court.
Section 203AB
Section 203AB seeks to restrict the last remaining director from resigning where there is not at least one remaining director of the company or the appointment of a new director by the end of day. Any director resignation will be rejected by ASIC where this occurs.
Section 203CA
Where a resolution is held by members of a proprietary company to remove a director of a company, the resolution will be void where the company does not have at least one director. This section does not impact cases in which the company is being wound up.
These changes seek to narrow the previous legislative loopholes which have allowed illegal phoenix activity to previously occur. The changes encourage good corporate governance by ensuring that directors comply with the obligations which have been bestowed upon them by keeping ASIC promptly informed of any changes to directorship.