As part of a suite of reforms enacted in 2020 to prevent illegal phoenix activity, the Federal Government passed the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) which came into effect on 18 February 2021 and introduced section 203AB to the Corporations Act 2001 (Cth) (the Act) to prevent a company from being abandoned by its directors and left without a board. Under section 203AB of the Act, the resignation of a director does not take effect if, at the end of the day that the resignation is to take effect, the company does not have at least one director, unless the resignation is to take effect on or after the day the winding up of the company is to taken to have begun. Section 203AB of the Act came into effect on 8 February 2021, however, until recently, had not been the subject of any substantial judicial consideration.
The recent case of Hutton, in the Matter of Big Village Australia Pty Ltd (Administrators Appointed) [2023] FCA 48 (Big Village Australia), in which Gilbert + Tobin acted for Matthew Hutton and Rob Smith of McGrathNicol in their capacity as joint and several administrators (the Administrators) of Big Village Australia Pty Ltd (the Company), marks the first time section 203AB has been applied by a Court.
The decision in Big Village Australia
In Big Village Australia, the Administrators sought orders under section 447A of the Act, or alternatively under sections 447C or 1322, to dispel any uncertainty about the validity of their appointment as joint and several voluntary administrators of the Company. In the months preceding their appointment, all but one of the Company’s directors resigned. The Administrators were then appointed by resolution of the last remaining director. The uncertainty regarding the validity of their appointment arose from two lingering issues:
the last remaining director was a resident of New York, leaving the company in breach of section 201A of the Act, which requires a proprietary company to have at least one director that ordinarily resides in Australia; and
prior to passing the resolution to appoint Administrators, the last remaining director resigned in accordance with the Company’s constitution. Under the terms of the Company’s constitution, this left the position of director vacant. However, the director later satisfied herself that, given section 203AB of the Act, her resignation was ineffective. The director proceeded to pass the necessary resolutions to effect the appointment of the Administrators.
Justice Anderson of the Federal Court gave orders that Part 5.3A of the Act is to operate as though the Administrators were validly appointed as joint and several administrators of the Company. Relevantly, his Honour held:
Section 203AB was introduced to the Act on 18 February 2020 and does not appear to have been the subject of judicial consideration. However, its terms are clear. It prevents a resignation taking effect if that resignation would leave the company without a director. In the present case, it operated to prevent Ms Kracht’s resignation taking effect on 13 January 2023. That meant that, notwithstanding cl 11.5(c) of the Company’s constitution, which provides that “the office of a Director becomes vacant if the Director resigns as Director by giving written notice of resignation to the Company ”, she remained the director at the time she passed the Resolutions. Ms Kracht relied on the assumption that the legislation had that effect at the time she passed the Resolutions.
Takeaways for directors: Section 203AB of Corporations Act 2001
Helpfully, his Honour adopted a clear and common-sense application of section 203AB of the Act. From this perspective, it provides some important lessons for directors - especially for sole directors or directors of companies facing headwinds:
section 203AB of the Act will apply notwithstanding any inconsistent provision in a company’s constitution;
a director who has attempted to resign, but whose resignation has been rendered ineffective by section 203AB of the Act, can continue to exercise the powers of a director, including the power to pass resolutions in accordance with the company constitution; and
having been prevented from resigning, the director will remain the subject of the full suite of directors’ duties, including the duty to act in the best interests of the company.
Gilbert + Tobin acted for the administrators in the above proceedings.