By Jen Singh, Solicitor – [SOURCE]
Key Takeaways
- If the resignation of a proprietary limited company director will leave the company without a director, the resignation of the last director will not take effect (refer to section 203AB of the Corporations Act 2001 (Cth) (Act)).
- This was the first time in which the Court had to consider section 203AB of the Act.
- It follows that the last director can carry out all actions, and is obliged to fulfil their directors’ duties as though their resignation was never tendered.
- Should section 203AB of the Act contradict the company’s constitution, section 203AB will prevail.
Overview
Section 203AB of the Act came into effect in early 2021 after the Federal Government passed the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) in order to combat phoenix activity. The purpose of section 203AB is to prevent company directors from resigning from their position in an attempt to abandon a company.
The Court was required to consider the application of section 203AB when determining whether the appointment of the joint and several voluntary administrators of Big Village Australia Pty Ltd (Company) was valid. The Administrators sought an urgent decision of the Court in order to dispel any concerns regarding the validity of their appointment.
The Administrators applied for an order under section 447A of the Act that Part 5.3A of the Act operate in relation to the Company as though the Administrators were validly appointed as joint and several administrators of the Company on 26 January 2023. The Administrators also, in the alternative, sought orders confirming the validity of their appointment under section 447C of the Act, or confirming that their appointment and actions subsequent to their appointment have not been invalid under section 1322 of the Act.
Issues for Consideration
The Court had to consider two key issues when determining the validity of the Administrators’ appointment.
Firstly, there was an apparent breach of section 201A(1) of the Act.
The Company is part of an international group of companies, referred to in the proceedings as the ‘BV Group’. The Company relied on funding from related parties in the BV Group to remain solvent. During 2022, BV group became unable to continue providing financial or strategic support to the Company. Further, all but one of the Company’s directors resigned between 31 October 2022 and 23 December 2022.
At all relevant times, the sole remaining director, Ms Dana Edwards Kracht, did not usually reside in Australia but instead resided in New York, USA. This caused the company to breach section 201A(1) of the Act, which provides that a proprietary company must have at least one director, and that director must ordinarily reside in Australia. On 25 January 2023 (New York time) Ms Kracht passed resolutions with respect to the solvency of the Company and the appointment of the Administrators (Resolutions) whilst being the sole director of the Company, and whilst not ordinarily being a resident of Australia.
Secondly, Ms Kracht had tendered her resignation as director on 13 January 2023, prior to the passing of the Resolutions. The Company’s Constitution permitted her resignation and provided that it would leave the office of director vacant.
It was after she had resigned that Ms Kracht considered that section 203AB of the Act would prevail over the Company’s Constitution and render her resignation ineffective and proceeded on the presumption that section 203AB had prevented her resignation from taking effect. As such, she subsequently passed the Resolutions, and the Administrators were appointed.
Decision
The Court took the view that the preferable approach to dispel doubt regarding the validity of the Administrators appointment would be to make an order under section 447A of the Act. Section 447A gives the Court broad powers with respect to modifying the application of Part 5.3A of the Act applies to a particular company, insofar as the order “be designed to achieve the objective of Part 5.3A [and] have a nexus with how Part 5.3A is to operate in relation to the particular company”.
When making such an order, His Honour considered the following factors:
- The likely insolvency of the Company;
- The inquiries the Administrators took to confirm the validity of their appointments;
- The potential disruption that may be caused by a future challenge to the validity of the Administrators’ appointment;
- The conduct of the directors prior to the appointment;
- Any work the Administrators have carried out on the assumption their appointments are valid;
- Whether substantial injustice would be afforded to any party by the making of the orders; and
- Whether making the order is otherwise inconsistent with the objectives of Part 5.3A.
His Honour was able to satisfy himself with respect to each of the above points. Accordingly, the Court ordered that pursuant to section 447A(1) of the Act, Part 5.3A of the Act is to operate in relation to the Company as though the Administrators were validly appointed as joint and several administrators of the Company on 26 January 2023.
Section 203AB
This decision marked the first time that section 203AB received judicial consideration since its implementation. His Honour held that the terms of 203AB are clear – it prevents a resignation from taking effect if the resignation would leave a company without a director. As such, the ‘last director’ is unable to resign and must fulfil all of their statutory duties and obligations even if the company constitution provides otherwise.
It is intended that this section assist in the prevention of illegal phoenix activity. His Honour confirming that the terms of section 203AB are clear will likely assist the Court in ensuring that companies cannot be abandoned, and knowing that the Court will interpret the legislation as making redundant any such resignation, may act as a deterrent to company directors who may be considering leaving their company without a director in office.
