Denied! Director's resignation ineffective as the Australian illegal phoenix prevention reforms bite

In brief - The new section 203AB was introduced into the Corporations Act 2001 (Cth) (Act) to prevent the occurrence of 'phoenixing'. Case law confirms section 203AB will nullify the last director resigning regardless of intent and what the company constitution may otherwise provide for.

In 2020, the Australian Federal Government implemented a series of reforms designed to curb illegal 'phoenix activity' where a company is liquidated, wound up or abandoned to avoid paying its debts. As one limb of that suite of reforms introduced in the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth), a new section 203AB was introduced into the Corporations Act 2001 (Cth) for the purpose of preventing directors from abandoning a company and leaving it without a board.

Under section 203AB, a directors resignation will not be effective if a company does not have at least one director at the end of the day a resignation is supposed to take effect, unless the resignation takes effect on or after the day the company's winding up begins.

Although section 203AB came into effect on 8 February 2021, it had not been judicially considered until Hutton, in the matter of Big Village Australia Pty Ltd (Administrators Appointed) [2023] FCA 48.

In that case, Mathew Russell Hutton, and Robert Bruce Smith who were appointed as joint and several administrators of Big Village Australia Pty Ltd sought orders (under section 447A of the Act) to clarify the validity of their appointment. Specifically, two issues arose:

1. The first issue was that the last remaining director who purported to appoint the administrators (a Ms Kracht) was ordinarily a resident in the United States, in breach of section 201A(1) of the Act which requires that a single director of a company must reside in Australia. The Administrators wanted clarity as to whether the this breach would invalidate their appointment as a voluntary administrators. 

2. The second issue was that Ms Kracht had purported to resign as a director leaving the company without a director.. However, it was only later, when the director realised that her resignation was ineffective because of section 203AB of the Act, that she then took steps to appoint the Administrators. 

Justice Anderson ultimately noted that there were conflicting views about the effectiveness of a resolution in circumstances like these, but that "the better view appears to be that the fact a company has breached s201A(1) does not affect the ability of the company to function (subject to the provisions of its constitution), and therefore does not affect its ability to appoint an administrator under s436A of the Act". His Honour consequently made orders pursuant to section 447A of the Act confirming the Administrators' appointment.

In reaching that conclusion Justice Anderson emphasised that the recently introduced anti-phoenix provision (section 203AB of the Act) clearly prevented Ms Kracht's resignation from taking effect despite her attempt to do so and despite the company's constitution allowing for it.

Takeaways include:

• Sole directors and "last man standing" directors who attempt to resign, will not be able to do so, despite what the company constitution may otherwise provide for;

• Even if that last director purports to resign, that resignation will be ineffective and they will retain the powers and duties inherent in their directorship;

• Although section 203AB was introduced for the purpose of preventing 'phoenixing' which is associated with bad actors and rogue behaviour, the effect of section 203AB nullifying the last director resigning will apply regardless of intent.