Section 203AB of the Corporations Act 2001 (Cth) was introduced in 2020 by the Australian Federal Government to combat “phoenixing,” a practice where companies evade debt by liquidation or abandonment. This section renders a director’s resignation ineffective if the company lacks at least one remaining director by the time the resignation takes effect, except when it coincides with the start of winding up proceedings.
Despite its introduction in February 2021, section 203AB was legally untested until the case of Hutton, involving Big Village Australia Pty Ltd, in 2023. The case raised two key issues: firstly, a director, Ms Kracht, violated residency requirements, casting doubt on the validity of her appointment of administrators. Secondly, Ms Kracht’s attempted resignation was deemed ineffective due to section 203AB, prompting her to appoint administrators later.
Justice Anderson clarified that a company’s breach of section 201A(1) does not impede its functionality or ability to appoint administrators, provided it complies with its constitution. Consequently, he confirmed the administrators’ appointment under section 447A of the Act.
Notable takeaways from the case are:
- Sole directors and “last man standing” directors cannot resign, regardless of the company’s constitution.
- Resignations by such directors will be ineffective, and they will retain their directorial powers and duties.
- Section 203AB, designed to prevent phoenixing, applies without regard to the director’s intent.
This development underscores the stringent application of section 203AB in Australia, serving as a deterrent against practices that circumvent financial obligations.
Our View:
Section 203AB of the Corporations Act 2001 plays a vital role in preventing the misuse of director resignations in insolvency. It aims to protect the interests of creditors, stakeholders and the integrity of the insolvency process by ensuring that directors cannot easily abandon their responsibilities when their company faces financial difficulties.
If you’d like to learn more about the implications of this latest judgement, email enquiries@rriadvisory.com.au for a confidential discussion.
Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to RRI Advisory’s 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.