Since as early as 2020, the Australian Federal Government has sought to address the issue of illegal phoenixing. Illegal phoenixing refers to the act of abandoning a company by transferring its assets and business to a new entity for little or no consideration, for the primary purpose of evading creditors. As a part of its measures to address illegal phoenixing, the Government has passed the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth), in force since 18 February 2021.
As part of these reforms, section 203AB was incorporated into the Corporations Act 2001 (Cth) (“CA”), which stipulates that a director cannot resign if the company is not left with at least one other director unless the resignation is to take effect on or after the commencement of the winding up of a company. The section seeks to prevent directors from abandoning a company immediately prior to its winding up or administration.
Section 203AB of the CA was recently considered in the case of Hutton, in the matter of Big Village Australia Pty Ltd (Administrators Appointed)  FCA 48 (“Big Village Australia”).
The matter of Big Village Australia
The administrators of Big Village Australia sought orders from the Court pursuant to section 447A of the CA, which gives the court general powers to make orders in respect of an administration of a company under part 5.3A of the CA. In these circumstances, the administrators sought the court’s orders as to the validity of their appointment. Alternatively, the administrators sought a declaration that the appointment of the administrators was valid pursuant to section 447C, or section 1322 of the CA.
The origin of issue arose as the administrators had been appointed by the resolution of a sole director. The uncertainty which arose after that, and which required Court intervention came to bear in the following circumstances:
- In appointing the administrators, there appeared to be a breach of section 201A of the CA, due to the last remaining director of the Big Village Australia residing in New York, in the United States. The breach being that pursuant to section 201A a proprietary company must have at least one director that ordinarily resides in Australia; and
- The remaining director resigned in accordance with Big Village Australia’s constitution, however, under the constitution, this left the position of director vacant, and therefore the resignation of the director was ineffective pursuant to section 203AB of the CA. As such, the director’s resignation was nullified and the director passed the resolution to appoint the administrators.
His Honour Anderson J of the Federal Court granted the orders sought by the administrators pursuant to section 447A of the CA. As a result, the administrators were determined to be validly appointed. His Honour also highlighted that irrespective of the provisions in the Company’s constitution, the director remained the director at the time she passed the resolution to appoint the administrators due to the operation and effect of section 203AB of the CA.
Implications for Directors
The Big Village Australia case provided crucial guidance as to how the ‘last director rule’ affects the ability of directors to resign from their position prior to the appointment of an external administrator. For insolvency practitioners and businesspersons alike, the next takeaways can be drawn from the judgment:
- Section 203AB of the CA will apply, regardless of any inconsistencies between a company’s constitution and the CA. In any event, the CA will take precedence and priority over a company’s constitution.
- Where a director’s resignation is ineffective as a result of section 203AB, the director continues to exercise all powers bestowed upon them by the CA, which includes the ability to pass resolutions as provided by the company’s constitution.
- As a result of point 2 above, directors will be subjected to their obligations under the CA, including their director’s duties, and should continue to act in the best interest of the company, despite their intention to no longer hold the position as director of the company.
Whilst the matter of Big Village Australia does not provide specific guidance on phoenixing activities, it does clarify the inability of directors to simply abandon entities without first appointing another director in their place. This, when considered against the full suite of anti-phoenixing measures the Government is implementing, including director identification numbers and the inability for directors to backdate resignations for more than 28 days, are each and all valuable steps in avoiding creditor’s being left to wear the costs of unrecoverable debts in the winding up of a phoenixed entity.
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