A Caution To Accountants: get the paperwork right on Director Resignations or face increased risks
For many accountants, reviewing a client’s corporate records to ensure they are up to date and match the information on the ASIC database is something that is done annually or on an ad-hoc basis. However these records now must be kept up to date or exiting directors will be exposed to ongoing risks.
Date of resignation
With the changes to the laws around directors’ resignations introduced in February of 2021, they must now be filed with ASIC within 28 days of resignation. Where this is not done, the effective resignation date will be considered to be the date it is filed with ASIC.
The changes, heralded as designed to combat illegal phoenix activity, serve to prevent the backdating of director resignations, and will close the door on those who chose to use director resignations to create a subterfuge as to who was actually in control of a phoenixed business. The changes also prevent resignations which would result in the company being left with no directors who could be held accountable, should a company ultimately be placed into liquidation.
While the policy reasons for the changes to the director resignation process are admirable, they do however expose accountants to increased risks should they inadvertently delay the lodgement of resignations with ASIC.
Why is it important that accountants become aware of this?
Directors who are listed as a director on the ASIC database have responsibilities under various laws that expose them to personal liability and in some circumstances, criminal prosecution. These duties continue whether they are actively involved in the company or not. Accordingly, a resigning director will want to ensure that they cut these obligations immediately upon their cessation.
Should an accountant find that they have been advised of a director’s exit from a business and fail to lodge the required resignation with ASIC, it could expose the exiting director to debts incurred between their intended date of resignation and the date of lodgement with ASIC.
If a claim against the “former” director is triggered for a debt incurred during this period, this could result in a claim against the accountant for negligence. Below is an example of how such a situation could play out:
On 1 April 2021 Mary resigned as a director and exited the business, leaving her long-time business partner John as sole director. At the time of exit she provides a written resignation letter to John anda copy to the company’s accountant. Immediately following the meeting, John, who is not so good with paperwork, asks the accountant to “do what is needed” to remove Mary as a director. Unfortunately, the accountant is very busy and defers attending to the resignation until “later”. On 1 October 2021 while preparing the year end accounts, the accountant remembers Mary’s resignation and immediately files the notice of resignation. Backdating the document to reflect Mary’s exit on 1 April 2021 is no longer allowed. Accordingly, Mary’s resignation is taken to have come into effect from 1 October 2021 and the trouble begins…
After Mary leaves the business, the company suffers severe liquidity problems resulting in it failing to pay any of its taxation obligations from 1 April 2021. Mary subsequently receives a Director Penalty Notice (DPN) from the ATO in regard to company tax debts owed for the June and September quarters. Mary is surprised to receive the DPN as in her mind she left the business on 1 April 2021 and has had nothing to do with the it since. The ATO explains to Mary that despite what she thinks, she was a director until 1 October 2021 and is personally liable for the unpaid tax up to that date. Meanwhile John refuses to accept the company is hopelessly insolvent and refuses to place the company into Voluntary Administration, continuing to trade by running up more and more debt. Ultimately the company is wound up by a disgruntled creditor and a Liquidator is appointed. The liquidator determines the company was trading whilst insolvent since April 2021 and issues proceedings against the directors Mary and John. Mary is rather upset about being liable to the ATO for unpaid company taxes and the prospect of facing a trading whilst insolvent claim and visits her lawyer…
After Mary leaves the business, John is told by Bill the widget machine operator that the safety guards on the widget machine were not working. John does not have the money to get these expensive repairs done so tells Bill the guards have no purpose and to get back to work. The machine suffers a malfunction and Bill is fatally injured. Worksafe inspect and the company and its directors are charged under the industrial manslaughter laws. If found guilty, the directors and the company may face millions of dollars in fines and for individuals, up to 20 years’ jail. Mary cannot understand why she is being embroiled in these charges given in her mind she resigned as a director in April 2021 when she handed her resignation to the company. She consults her lawyer….
A reprieve? Can a late lodgement be remedied?
There will only be limited avenues available to seek permission for an older resignation date to be recorded and these avenues will involve either an application to ASIC or the Court. In some circumstances, the application can only be made to the Court. Given the behaviour the changes to laws around director resignations seek to address, it is doubtful such applications will be looked on as merely procedural and therefore are likely to be complex and costly.
Applications to ASIC
Applications must be made within 56 days of the claimed resignation date. The application can be made by the former director or the company by filing the prescribed form setting out the reasons why an earlier resignation date should be accepted. If ASIC accepts the application, the resignation date will be fixed as at the claimed resignation date.
Applications to Court
Applications must be made within 12 months of the claimed resignation date unless the Court allows a longer period. If the Court fixes an earlier resignation date, the Order must be lodged with ASIC by the applicant using the prescribed form within two business days of the Court making the order. Failure to do so is an offence of strict liability and late fees will apply.
The Key Take Away
Lodging resignations months after the event creates great risk for the exiting director and in some circumstances, may expose the accountant to a potential PI claim. Accountants should revisit their internal systems and controls to ensure any director resignations they are made aware of are lodged within the required time frames. They should also make clients aware of these changes so they too are aware of their duties in informing ASIC of any changes to directorships and the risks they face should they fail to do so.
Questions? As usual, don’t hesitate to contact us.