Director crackdown: ASIC tightens rules on resigning or removing business owners
Sometimes, the only way to secure the best interests of a company is for a director to resign, retire or be removed. Here’s how to do it the legal way.
It is important that you follow the formalities for resigning as a director, to ensure you are no longer named as a director on the record.
1.Follow the company’s constitution or replaceable rules
How you resign as a director of a company is dependent on how your company is governed. Does your company have its own constitution, has it adopted the replaceable rules under the Corporations Act 2001, or is it using a combination of both?
As a general rule, a company’s constitution will deal with resignations and removal of directors, as well as the procedures for filling casual vacancies caused by a director leaving the company. Reading the constitution is always an excellent starting point for a director or board faced with this situation.
If you do not have a Constitution, the Replaceable Rules from the Corporations Act 2001 (Cth) will come into play. Replaceable rules are a basic set of rules for managing your company. If a company doesn’t have a constitution, it can use the replaceable rules instead. If a company uses the replaceable rules, it does not need to have a written constitution and won’t have the expense of keeping it updated as the law changes.
Whichever rules are adopted in your company, it is very important for a director seeking to resign to follow the formalities.
Resigning or removing using replaceable rules
If your company uses replaceable rules:
- A director can resign as a director of a company by giving written notice of resignation to the company at its registered office;
- A proprietary company may, by resolution, remove a director from office and may, by resolution, appoint another person as a director instead;
- A public company may, by resolution, remove a director from office.
2. Notify ASIC of the registration or removal of a company director
As a director, you may notify ASIC of your resignation or removal from the company (now within 28 days). To be effective, the notice of resignation must be accompanied by a copy of the letter of resignation given to the company.
Changes to director resignations from 18 February 2021
In February 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 was enacted to help combat illegal phoenix activity. Illegal phoenix activity includes the creation of a new company to continue the business of an existing company that is intentionally closed down to avoid paying its debts.
In relation to directors, and effective 18 February 2021, the reforms include that:
- the last director of a company may not resign as a director unless that director is simultaneously replaced by a new appointment; and
- the effective date of cessation of any director will be the date of cessation specified in the ASIC form notifying of the cessation provided that the ASIC form is submitted within 28 days of the date of cessation. Failure to notify ASIC within the 28 day period will mean that that director’s cessation will be effective on the date of lodgement of the notice to ASIC of the cessation – which effectively extends the appointment period of that director. A failure to lodge a notice with ASIC within the 28 day period is also a strict liability offence that attracts a late lodgement fee.
It is important for companies to comply with their obligations under the Corporations Act. This includes when a director resigns, retires or is removed from a company.
Directors should ensure that they promptly notify ASIC of any resignations, or ensure that the company lodges the correct notification with ASIC in a timely manner.
For more information please contact the author or any member of our Restructuring, Turnaround & Insolvency team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.