A ship without its captain.

In day to day operations, companies act through its board of directors. The board tends to make strategic and operational decisions and is responsible for ensuring the company meets its statutory obligations. What happens when the company loses its board of directors?

A ship must have its captain

s 201A of the Corporations Act 2001 (Cth) (Act) provides that:

  1. a proprietary company must have at least 1 director who must live in Australia.
  2. a public company must have at least 3 directors and at least 2 must ordinarily reside in Australia.

Breaching statutory requirements

1. Company
Failure to act promptly and breaching s 201A of the Act can result in:

  1. ASIC serving a penalty notice on the company, requiring it to pay a penalty of $1062.50; and
  2. The company being prosecuted for failing in its statutory obligation to have the minimum number of directors.

2. Directors
There remains significant uncertainty on the court’s position regarding director’s personal liability for such a breach. Notably, in Re Continental Pacific[1], Barrett J, in discussing the rule for public companies under s 201A(2), was concerned an individual’s right to resign would be restricted. This may be so if directors are personally liable where directors simultaneously resign, causing the number of directors to fall below the required minimum.

Because a director can resign unilaterally without informing ASIC, phoenix operators have been exploiting the current law to avoid personal liability by abandoning companies, leaving companies without:

  1. any assets to meet its liabilities; and
  2. any directors.

However, in an effort to combat illegal phoenix activity, the Australian Government announced in May 2018, as part of its Budget papers, a reform package to combat phoenix operators. The Budget announcement seeks to implement measures to limit the ability of directors to resign by deeming:

  1. resignations that leave a company with no directors ineffective; and
  2. acts of abandoning a company an offence.

Lessons to avoid ships sailing

If a company finds itself in a situation where it has no directors, it would be in breach of the Act and must make every effort to rectify the situation as quickly as reasonably possible, including by convening a general meeting to appoint new directors to the board.
To ensure the company remains compliant of its statutory obligations, and to avoid personal liability in light of the government’s crackdown on directors ‘abandoning ship’, prudent directors should ensure a succession plan is implemented for when they are no longer willing or able to act in their role.

Moral of the story? A ship cannot sail without a captain and succession plans should be implemented in case the ship sails away. Reach out to one of Bespoke’s corporate team to avoid your ship sailing away.

[1] Re Continental Pacific [2002] NSWSC 789.

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Commercial & Corporate

Posted on: 30 July 2018