I am extremely proud to admit we have never had a situation within the practice whereby phoenix activity has been considered by a client.  Unfortunately though, in the broader community, and certain industries are more susceptible to it than others, it is certainly prevalent.  A report issued by the Phoenix Task Force estimated the direct cost to the Australian economy of phoenix activity to be between $2.85b and $5.13b in 2015-16 alone.

What is “phoenix activity”?  Generally phoenix activity will occur when a company’s directors (or other controlling entity) sanctions the “stripping” of assets in one company and transferring them to another entity.  The intention of such transactions is to prevent the first company’s creditors from accessing the company’s assets.  Why “phoenix”?  Well the activity is likened to a bird rising from the ashes refreshed and anew.

Traditionally, both the Australian Securities Investments Commission (‘ASIC’) and the ATO have struggled to police such activity.  The result being many employees, business contractors and statutory bodies, being left in some cases, significantly out of pocket.

To assist them in their efforts to hold companies accountable, Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (‘the Bill’) was re-introduced into parliament in July 2019 (it had been introduced in February 2019 but it’s passage through parliament was suspended due to the Federal election) with the intention of providing specific provisions designed to help combat phoenix activity.

  1. Improving the Accountability of Resigning Directors

Provisions are to be introduced which prevent directors from backdating resignations in order to avoid or transfer the liability of illegal phoenixing activity.  From the date of enactment of the new laws, ASIC must be notified of the resignation of a director within 28 days or the resignation will be taken to be effective from the day ASIC is notified.

Under the Corporations Act 2001 a company must have at least one director (who must be an Australian resident and over the age of 18).

Where a company engages in illegal phoenixing activity, unscrupulous directors may take certain steps to obscure their role in such activity.  One such method is the use of a “straw director”.  This is someone who has no real involvement with the company, no knowledge of either their appointment or the business activities and is often limited in their financial means.  In some cases “straw directors” may be a deceased person or completely fictitious.

Another method of obscuration is to backdate the resignation of a director to either implicate a new director in the illegal activity or, to leave the company without any directors at all.

In the latter case, such abandonment means ASIC are unable to be notified of the resignation and a company may continue to incur liabilities until such a time where creditors or ASIC arrange for it to be wound-up.

  1. New Voidable Transaction and Duty to Prevent Creditor-Defeating Dispositions

A new voidable transaction provision is to be included into the Corporations Act 2001 with the intention of addressing phoenix activity.

Broadly this provision will void transactions whereby assets have been transferred to third parties at significantly less than market value with the intention of of preventing or hindering the property being available to meet the demands of a company’s creditors.

In addition, the transaction needs to have occurred when the company is insolvent, immediately before it becomes insolvent or becomes insolvent within twelve months.  Voiding a transaction will have the effect of restoring the asset to it’s original position.

In order to void a transaction, a company’s liquidator will be required to apply to the court within certain time frames and will need to establish whether the company was or is insolvent in relation to the transaction.

In addition to the current solvency laws, an additional provision has been included whereby insolvency will be assumed in the event financial records have not adequately been maintained.

  1. GST Estimates and director penalties

Currently, the director penalty regime makes directors personally liable for the non-payment of superannuation guarantee charge (‘SGC’) and employee PAYG.  Further, directors are personally liable for estimates of both SGC and employee PAYG.

The new provisions will allow the ATO to include Goods and Services Tax (‘GST’), Luxury Car Tax (‘LCT’) and Wine Equalisation Tax (‘WET’) estimates in the liabilities of a company.  Further, the director penalty regime will be broadened to ensure company directors will are personally liable for such amounts.

  1. Retention of Tax Refunds

The proposed changes will allow the Commissioner of Taxation (‘the Commissioner’) to retain tax refunds where a taxpayer has not lodged or provided when requested, information to the ATO in relation to a lodgement.  This will ensure tax obligations are satisfied and outstanding amounts of tax are paid before refunds processed.

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