News & Insights

When an employee gives notice that they are resigning from their employment, the employee can generally take comfort that their employment will cease at the end of their notice period and so will their obligations to the Company.

But what happens when you are appointed (and potentially employed) as a Company Director? Can you simply say, “I Quit” and storm out the door?

how do I resign?

Step 1: Beware of trigger events. It is not uncommon for a director to also be an employee or a shareholder of the company. In some Shareholders Agreements or employment contracts, resigning as a director can trigger an event of default and require you to also terminate these arrangements. For shareholders, this will sometimes trigger ‘bad leaver penalties’ and may require you to sell your shares for a reduced price. Resignation may also trigger post-employment restraints of trade.

Step 2: Check the company’s constitution (if you have one). Under section 203A of the Corporations Act, a director can resign with immediate effect by giving written notice to the company at its registered office. However, this is a replaceable rule and the company’s constitution may require a director to serve out a notice period (and if you are an employee, check your notice period requirements here too). When giving notice, it must clearly state the date on which your resignation becomes effective.

Step 3: Confirm acceptance. We also recommend that the company holds a meeting or passes a resolution, accepting the resignation (this is not strictly necessary but is good corporate governance). The minute should further specify who will attend to the relevant ASIC notifications and eliminates any debate the company did not receive a resignation.

Step 4: Notify ASIC. Companies are required to maintain records with ASIC and have an obligation to notify ASIC of a director’s resignation within 28 days. This process has recently been the subject of change after the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Phoenixing Act) was passed in February 2020.

what are the changes to asic notifications?

Previously, if a company failed to notify ASIC of a directors’ resignation within 28 days, the company or a director could still notify ASIC of its resignation and incur a late fee penalty. Consequently, directors could backdate their resignations and incur the late penalty but were not precluded from recording their resignation.

When a company goes under, it is not uncommon for directors to start ‘jumping ship’ and like the Titanic, each director generally wants to be on the first life boat. The ability to lodge a backdated resignation resulted in companies being left without directors and misinformation in public records, making it difficult for liquidators and the public alike, to determine when a director was acting for the company.

With effect from 18 February 2021:

1. Unless a company is being wound up, ASIC will no longer permit the cessation of the last remaining director on the ASIC record (noting that companies must meet the minimum number of director requirements under the Act); and
2. Companies who fail to notify ASIC within 28 days of their resignation will have the resignation automatically dated the day the notification of the resignation was lodged with ASIC. (i.e., If a director resigned on 1 January 2021 but ASIC was not notified until 1 March 2021, then the ASIC record will show the date of resignation as the date the form was lodged, that is, 1 March 2021).

If a company or a director wants to have their resignation backdated to the correct effective date, they will need to apply to ASIC or the Court to have the date changed. An application to ASIC must be made within 56 days of the claimed resignation date, otherwise, the director must seek a Court order to change the date (and incur the expense in doing so). An application to the Court must be made within 12 months of the claimed resignation date (unless a longer timeframe is allowed by the Court).

Companies are required under section 205(B) of the Act for notifying ASIC of a director’s resignation by lodging a change to company details form (or a Form 484). However, companies are forgetful or potentially spiteful, and may fail to notify ASIC of the change, leaving the director on the hook until the notification is lodged.

As a practical tip, a director can always notify ASIC of its own accord that it has resigned from the company using a Form 370. Whether you are quitting or have sold your company to a third party, you should always obtain confirmation from the company that your resignation has been recorded with ASIC. Now a failure to do so may result in expensive court procedures or in the worst-case scenario, liability for the actions taken by the company after your purported resignation.

why is the date of my resignation important?

The Corporations Act 2001 (Cth) (the Act) imposes various statutory duties on a company director, including a duty to prevent insolvent trading (see s. 588G of the Act). A failure to discharge this duty may result in the company trading whilst insolvent, leaving creditors short changed. To prevent directors from allowing the company to trade whilst insolvent, the Act gives liquidators the ability to void transactions, clawback money and prosecute directors personally for liabilities that they incurred on behalf of the company whilst it was insolvent. Inevitably, this has resulted in directors intentionally back dating their resignations to escape liability and is one of the many dishonest actions that the Phoenixing Act is seeking to stop.

other considerations – directors can still be on the ‘hook’ for company liability even after effective resignation

Resignation will not automatically relieve a director of all personal liability for the debts of the company. We commonly see directors who have signed personal guarantees for the debts of the company, sometimes unintentionally as the guarantee is ‘hidden’ in the fine print of common commercial documents (such as credit /trading accounts). These guarantees can also include a charging clause whereby the director charges its personal property to secure payment of company debts. To be relieved of this liability, further steps are necessary to obtain a release or indemnity in favour of the retiring director.

as a director, can I expect more changes?

Yes. Following the Royal Commission into the Banking, Superannuation and Financial Services Industry, ASIC and the Federal Government promised to crack down on dishonest conduct and white-collar crime. The Phoenixing Act is one of many proposed changes to the Act (for others see our article on Directors Identification Numbers. We can expect more changes as companies begin to deal with the changes and economic fallout of the Covid19 Pandemic.

Macpherson Kelley is often tasked with advising on the rights and duties of a company director, including retirement and the termination of any associated shareholder or employee arrangements. If you require advice or further assistance navigating the changes to the Act, or corporate matters generally, please contact Cathy Russo or a member of the Commercial Team.