You love your small business and you may have even built it from nothing. What happens now that you have decided to move on to pastures new?

The question of whether the sole director of a company can resign their post, leaving their company without a director, is one which has great relevance for small business owners.

Recent reforms passed in February 2020 mean that it is not as straightforward as simply handing in your resignation and serving out your notice. In order to avoid legal headaches later on, it is important to make sure you have a good handle on what the law says on this matter.

So, what does the law say?

In February 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act was introduced in order to amend some of the oversights of the Corporations Act of 2001.

The last of the Act’s measures will take effect on 18 February 2021, each of which have significant implications for directors of small businesses, especially in cases where the small business only has one director.

The Act has been introduced in order to curb the corporate practice of phoenixing, where a director takes their assets to a new company on resignation, leaving the existing company with debts and skipping out on liability for their own practices.

One of the other aims of the Act is also to prevent directors from backdating their resignation date, a practice which is relatively prevalent in the corporate world.

Additionally, the new Act will allow for tax refunds to be retained when required.

How will the new Act change things?

In order to stop phoenixing from happening, directors wishing to resign their post will need to inform the Australian Securities and Investments Commission (ASIC). As long as the ASIC receives notice of a resignation within 28 days, the resignation will be recognised and will not be contrary to the law.

However, if at any point the resigning director does not inform the ASIC of their intention to resign, they could be seen to be backdating their resignation date and, as a result, may face criminal and civil penalties.

How does this apply to sole directors?

Those wishing to resign as director when they are the sole director of a business, which is more than likely when the business in question is small, cannot, in fact, resign.

ASIC will not accept notification of a resignation from sole directors. The reason behind this is simple: if a sole director resigns, the company can essentially be abandoned or left without anyone to take responsibility for its running.

Does this mean that you are shackled to your small business for the rest of your life? Of course not! You cannot resign, but you can be replaced. Another director must be appointed in your place before you can leave. This makes business sense and protects you, the outgoing director, and the company you are resigning from.

What else should I consider?

As long as you and your company have secured a replacement for you once you have resigned as director, you may also want to think about selling your shares (if you are a shareholder) at the same time as leaving the company.

Don’t forget to check with your company if you wish to keep hold of your shares as there may be other parameters to consider, such as whether your shares are unvested.

Time to say goodbye

 Once you are satisfied that you have followed the requirements of the Treasury Laws Amendment Act, and you know that you are leaving your small business in a safe pair of hands, there is nothing left to do but say farewell!

And enjoy your next adventure, whatever it may be.

Blaine Hattie is a commercial and insolvency lawyer who assists clients that are looking at restructuring or making changes to their business.

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