Rules to stop directors from backdating resignations

The Federal Government’s Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 came into effect on 18 February 2021. The Act includes provisions to stop directors from:

  • Backdating their resignation as director; and
  • Resigning as a director, if the director is the only existing director.

Issues with backdating of director resignations

It has been a tactic for directors to backdate their resignation to avoid liabilities to a Liquidator, the ATO and creditors in general. Often this is a result of the director being involved in illegal phoenix activity.

In a liquidation, certain claims like insolvent trading and breaches of duties can only be pursued against a director. The modus operandi of these directors is to resign and backdate their resignations, often more than one year, which makes pursuing claims against them considerably more difficult.

A Liquidator can seek to prove a person is in fact the de facto director of a company but that is difficult, especially if there are no other directors, or the current director is not willing to assist or provide records.

Directors will also avoid liability through Director Penalty Notices as the ATO uses the resignation date to determine liability for unpaid superannuation and taxes.

Effect of the new rules

Under the rules, a director will have 28 days to lodge an ASIC Form 370 to notify the ASIC of their resignation. Directors who lodge their notices after the 28-day period will be taken to have resigned on the date ASIC received the notice.

A further point to note for directors is that if a resignation of a director will leave a company without any other director, ASIC will reject the lodgement. This is an important point to note as two separate forms are required to appoint (ASIC Form 484 – Change to company details) and resign (ASIC Form 370 – Notification by officeholder of resignation or retirement). It is thus prudent to first appoint a director before the other resigns to avoid complications.

Oversight or mistakes

There might be instances where a director did not lodge the ASIC Form 370 within the 28-day period for valid reason. In those circumstances, a director can apply to the following for the mistake to be corrected:

  • ASIC if within 56 days after the resignation; or
  • The Court.

Penalties for illegal phoenix activity

The reforms are introduced to detect, deter and disrupt directors and advisors who attempts illegal phoenix activity. Illegal phoenix activities cost the government billions of dollars in the form of unpaid taxes, employee entitlements and debts, not to mention compliance costs.

As written previously, illegal phoenix activities are serious breaches of the law which include breaches of directors’ duties, concealment and removal of assets, or even fraud by company officers under the Corporations Act 2001.

It is thus unsurprising that the penalties for such activities include not only large fines, but also up to 15 years of imprisonment.

An application to the Court will have its own costs that need to be considered.

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Posted on 04-07-21 in Business insolvency, Liquidation.