The government has moved to tighten the rules around director resignations in a bid to crack down on backdating and company abandonment.
With the wheels of the legislature moving again this week, the returned Coalition government yesterday introduced half a dozen reforms into parliament aimed at tackling the black economy.
Under reforms tabled in the lower house directors would no longer be allowed to resign if doing so would leave their company without a director.
Current rules allow directors to be removed by a resolution of company members at any time, subject to its constitution.
The changes will also look to prevent the backdating of director resignations by tightening corporate regulator ASIC’s notification process, although companies being wound up are exempt.
Currently, directors must notify ASIC within 28 days of their resignation, but under the new rules, any director which takes longer will have their resignation date set to whenever ASIC is notified.
Directors will be able to apply for exemptions, but the crackdown is designed to prevent business owners from doing a runner before ASIC can establish whether misconduct has occurred.
It is also hoped the new laws will reduce the number of instances where ASIC has to step in to wind up a company, when directors abandon businesses.
The laws, expected to pass parliament without fuss, are just the latest regulations targeting company directors in recent years as the government looks to stamp out black economy activity, particularly illegal phoenixing.
Last year new laws were introduced which will force directors to sign up for unique identification number which will assist in track directors to past businesses, while more stringent ABN laws were also proposed earlier this year.
Directors selling assets on the cheap could face jail
Also introduced yesterday were laws adding new phoenixing offences to the Corporations Act which will create new criminal penalties for directors who sell assets on the cheap, hampering creditor efforts in the event of liquidation.
Directors who don’t prevent company property from being sold on uncommercial terms (less than market value) and those who facilitate those transactions face the prospect of jail time under the changes.
For example, a director who sells company property to another entity they may be involved with before placing the first business into administration could be pursued for leaving the company unable to pay out creditors through the sale of those assets.
The changes will also allow non-commercial transactions to be voided if they’re made while a company is insolvent, or if the company becomes insolvent as a result of the transaction within 12 months.
ASIC will also be given new powers to recover, for the benefit of creditors, company property that’s been sold off, should liquidators apply for relief.
Under the crackdown, it will also be a criminal offence to encourage a director to engage in the uncommercial sale of company assets where a “reasonable person” would know the result would rip off creditors.
Safeguards for legitimate businesses
The changes have the potential to undermine legitimate business activity, so the government has included several “safeguards” aimed at protecting law-abiding directors taking risks.
For example, transactions made under deed of company arrangements will be exempt from being voided, even if the company is insolvent at the time.
Transactions made by liquidators or external administrators appointed by the company will also be exempt from the amendments, while safe harbour provisions will seek to prevent directors from liability if their actions are “reasonably likely” to lead to a better outcome for the company.
The amendments don’t stipulate what “reasonably likely means”, which leaves determining the specifics to case law.
Credit: Smart Company