Kerrs recently acted for One Tree Agriculture (One Tree), the respondent of an application asking the Federal Court to fix the date of a director’s resignation to a time earlier than the date recorded by ASIC.
The application was brought pursuant to the relatively new s 203AA of the Corporations Act 2001 (Cth) (the Act) by way of an interlocutory application, within substantive proceedings brought by One Tree against the company’s two directors for their failure to prevent the company from trading while insolvent.
The application, brought by Director 1, sought the following orders:
- an extension of time to make the application under s 203AA(5)(b)(ii); and
- that the date of her resignation be fixed at 1 July 2021 (from 27 April 2022) pursuant to s 203AA(2).
The application was accompanied by a second application in which Director 2 sought relief pursuant to s 1322(4)(c) from civil liability due to his failure to lodge notice of Director 1’s resignation as director with ASIC within 28 days of her ceasing to be a director, as required by s 205B(5). The second application is irrelevant as it could only be considered upon the success of the first.
Ultimately, the applications were dismissed for the following reasons:
- Director 1 could not show that she stopped being a director on the date declared. As a result, s 203AA could not be enlivened and her resignation was not effective.
- Director 2 did not provide signed consent to act as director as required by s 201D and there was no assertion made that he was a de facto director. He was not validly appointed as a de jure director or even as a s 9AC(1)(b) director at the time of Director 1’s resignation. As s 203AB requires a company to have at least one director, the resignation was not effective.
- Director 1 did not satisfy the Court that it would be just and equitable for the Court to make the orders she sought as required by 203AA(3).
- Director 1 did not satisfy the Court that the 12-month time period in which she was permitted to bring her application, should be extended under s 203AA(5)(b)(ii).
Derrington J provided helpful guidance on the proper operation of ss 203AA and 201D of the Act which is summarised in this article.
BACKGROUND
The company was incorporated on 1 October 2008 with Director 1 holding the only share. She was the sole director from incorporation until 9 June 2016 when Director 2 was appointed and Director 1 resigned. Director 2’s tenure was short and he ceased as director on 19 January 2017 when he was declared bankrupt. On 1 April 2017, Director 1 was re-appointed as director and remained so until 27 April 2022 when the company lodged the prescribed resignation forms with ASIC. The resignation forms stated that she resigned as director on 1 July 2021, shortly after Director 2’s discharge from bankruptcy on 18 January 2021.
As the forms were not submitted within 28 days of the alleged resignation, ASIC was required under section 203AA(1)(b) to record the resignation as effective from 27 April 2022 – the date it received notification of the resignation. Along with Director 1’s resignation forms, the company notified ASIC of Director 2’s appointment which he claims occurred on 1 July 2021. This was accepted by ASIC and recorded on its records. Director 2 continued to act as director until 8 July 2022 when the company entered liquidation.
The July 2021 resignation
The directors’ relied on affidavit evidence of a conversation held between them sometime prior to Director 2’s discharge from bankruptcy. The conversation was effectively that once Director 2 was discharged from bankruptcy, he would replace Director 1 and she would not need to continue as a director.
Sometime after his discharge (on 18 January 2021) but prior to 1 July 2021, another conversation occurred stating that Director 2 could now act as director, as he was discharged from bankruptcy, and that Director 1 could resign as of 1 July 2021. No further action was taken by the directors to formalise the resignation.
Wind-up and commencement of proceedings
On 28 March 2022, One Tree issued a statutory demand on the company in relation to outstanding invoices issued between 31 January and 10 March 2022. No attempts were made to satisfy the debts underlying the demand nor was any attempt made to have it set aside. The company was wound-up in insolvency and a liquidator appointed on 8 July 2022.
Following the wind-up of the company, the Liquidator identified a possible claim of insolvent trading and sought our advice as to how they could recover the funds.
THE OPERATION OF SECTION 203AA – RESIGNATION OF A DIRECTOR
Derrington J stated that one of the purposes of section 203AA is to ensure that anyone dealing with a company can rely on ASIC’s register to accurately display details of a company’s directors at a particular time. It is concerned with when a person stops being a director. An act which, he says, appears to be ‘the equivalent of ceasing to act as a director or to carry out the functions of a director’.
In instances where a director resigns in accordance with s 203AA(1)(a), that is, where ASIC is notified within 28 days of the resignation, no further proof other than the notification itself is required by the resigning director. However, if a director requests that the Court, under s 203AA(5)(b), record the resignation as effective from an earlier date (more than 56 days after the person stopped being a director) the director must satisfy the Court that they stopped being a director on the date alleged.
How does a person prove they stopped being a director?
Ideally, a director will resign from their position in writing which is accepted by the company. Where the company has only one director, a resignation can only be effective if another director is appointed on that same day. A company must have at least one director at all times.
In this case, Director 1’s evidence comprised a recount of a conversation held with Director 2 about a prospective resignation. Director 1 also submitted a signed resolution dated 14 April 2022 which claimed the company had resolved that her resignation occurred on 1 July 2021. The evidence here was insufficient which raised several issues. Specifically, the Company’s constitution required that written notice of resignation be given to the company at its registered office. This did not occur. The Court accepted that a verbal resignation could have been acceptable but that did not occur either. The only evidence adduced was the conversation between the directors which occurred prospectively. There was no evidence to support a finding that the Company accepted a resignation by Director 1.
The applicants argued that a prospective resignation is permitted as per the decision in Cain v Aero Marine Consulting Pty Ltd (2003) 133 FCR 1, 13 (Cain). However, the circumstances in Cain were substantially different as, in that case, there was substantial evidence to support that the resignation was previously agreed, always intended and would occur on a specific date. There was a Heads of Agreement, various internal correspondence confirming when the resignation was approaching, the appointment of two directors to replace the resigning director and several conversations between the resigning director and his replacements.
As far as a prospective resignation is concerned, the Court would require clear and convincing evidence of the parties’ intention that a resignation is to occur and the specific terms of that resignation. In this case, the conversation was not enough and was merely considered an intention they would, but ultimately did not, act upon.
Further issues involved a lack of evidence about the actual duties Director 1 performed in her tenure. This made it difficult for any finding to be made that she stopped being a director as a result of ceasing to perform those duties.
Section 203AA applies to de facto and shadow directors
Interestingly, Derrington J said there is no reason why s 203AA should apply only to de jure directors when the definition of ‘director’ provided in section 9AC includes alternate, de facto and shadow directors. There is nothing to prevent these categories of directors from resigning by giving the appropriate notice.
The effect is that any director not validly appointed yet acting in the capacity of a director, will continue to be regarded a director of a company, until they comply with the requirements of section 203AA and have their resignation recorded on ASIC’s records. De facto and shadow directors should be fully informed about the risks involved with undertaking activities that would place them in the category of a s 9AC(1)(b) director and be diligent about ensuring their resignation was effective.
THE OPERATION OF S 201D – CONSENT TO ACT AS DIRECTOR
Much consideration was given to s 201D of the Act which requires a director to give his or her consent to the company prior to being appointed. The question Derrington J sought to answer was ‘if a director did not give written consent to the company, would non-compliance invalidate the appointment?’.
Derrington J considered the various authorities on the matter[1] and concluded that compliance with s 201D by the company is a requirement for a valid appointment.
The Act provides two classes of director; the s 9AC(1)(a) director who is validly appointed and the s 9AC(1)(b) director who assumes directorship through their actions. In the first case, the director must give written consent to the company who is obligated to retain it. This is a requirement for a valid appointment. In the second case, consent of the director is still required (a person cannot become a director against their will), but it may be evidenced either in writing or through some course of conduct. If written consent is not given prior to the appointment, the director will not be considered a person appointed to the position of director in accordance with s 9AC(1)(a). However, they are not prevented from being deemed a de facto or shadow director.
In this case, Director 2 did not give written consent to the company prior to his appointment so he was found to not be validly appointed. Furthermore, there was no evidence adduced by the applicants to suggest he acted as a de facto director. As far as this judgment is concerned, he was not found to have been a director at all. In addition to the other various issues, this caused Director 1’s resignation to be ineffective due to the operation of s 203AB which requires at least one director.
It must be just and equitable to fix the resignation date
Even if a person is able to satisfy a court that they stopped being a director on a particular date, the court cannot fix the resignation date unless it would be just and equitable to do so, as required by s 203AA(3).
In this case, Director 1 said the test was determined by balancing the benefits and detriments to each party should her application succeed. If the applications were dismissed she could be found liable for the insolvent trading claim made against her and be required to liquidate her assets. Derrington J acknowledged the seriousness of her situation and said that should be a consideration but otherwise disagreed with that approach.
The issue here was that, had Director 1 properly resigned on 1 July 2021, One Tree may not have commenced proceedings at all. Director 1 was at fault for not notifying ASIC of her resignation. If the applications succeeded and her resignation was fixed at 1 July 2021, One Tree’s time and resources would have been wasted due to their decision to litigate following reliance on ASIC’s records. Had Director 1 reimbursed One Tree for costs incurred as a result of her failure to notify ASIC it may have been just and equitable for the Court to fix the resignation date at 1 July 2021.
Director 1 did not discharge the onus of satisfying the Court that it would be just and equitable to make the orders she sought.
No explanation was given for the delay in bringing the application
Pursuant to s 203AA(5)(b)(ii), Director 1 was also required to satisfy the Court that it would be appropriate to extend the 12-month time-period within which she was permitted to bring the application. No explanation was given for the delay. While the application had already failed on more technical points above, Derrington J confirmed it failed on this point also.
[1] The preferred the approach was that taken by Black J in Re Whitsunday Clean Sands Pty Ltd [2017] NSWSC 1199 and Austin & Black’s Annotations to the Corporations Act. See paras 70-90 of the judgment for full discussion of the authorities.
In conclusion, this case highlights the complexities surrounding director resignation and the importance of adhering to statutory requirements under sections 203AA and 201D of the Act. The Court’s dismissal of the applications emphasizes the necessity for clear evidence and timely compliance with statutory obligations to ensure the effective resignation of directors. This case serves as a cautionary tale for directors to diligently manage their resignations and for companies to accurately maintain their records with ASIC to avoid litigation and potential personal liabilities.
Authors:
Jessica Hutchinson, Solicitor
Paul Hutchinson, Solicitor Director
The case can be downloaded here –
One Tree Agriculture Pty Ltd v Lye [2025] FCA 126