New laws come into effect to address illegal phoenixing

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth) (Act) came into operation on 18 February 2020.  The purpose of the Act is to give regulators greater powers to ‘detect and disrupt phoenix activity, and to prosecute directors and other professional advisors who engage in or facilitate the activity’.[1]

Illegal phoenixing involves the stripping and transferring of an entity’s assets, thereby denying creditors’ access to those assets to meet unpaid debts.  Creditors, including employees, are often left out of pocket due to illegal phoenixing and these amendments are designed to crack down on directors who actively seek to avoid paying creditors and employees and dodgy pre-insolvency advisors who recommend and facilitate illegal phoenixing.  

Key points

The key measures introduced are:

• strengthening enforcement options through the introduction of new phoenix offences and civil penalty provisions, carrying the highest penalties available under the law, to target both those who conduct or facilitate illegal phoenixing;
• introduction of a new recovery power for ASIC, and extending the recovery provisions available to liquidators, to improve their ability to recover assets lost through illegal phoenixing;
• preventing directors improperly backdating resignations, or ceasing to be a director, when this would leave the company with no directors to avoid liability or prosecution;
• extending the director penalty provisions to allow the Commissioner to collect anticipated GST and related liabilities thus making directors personally liable for these liabilities;
• expanding the ATO’s power to retain refunds where there are outstanding tax lodgements; and
• protecting the interests of legitimate businesses when restructuring or attempting to turn around a financially distressed business by protecting transfers of property made when the directors are in a safe harbour against insolvent trading.

Creditor defeating dispositions

The Act introduces a new concept known as a creditor defeating disposition.  A disposition of property of a company is a creditor-defeating disposition if:

• the consideration payable to the company for the disposition was less than the lesser of the following:
  • the market value of the property;
  • the best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time; and
• the disposition has the effect of:
  • preventing the property from becoming available for the benefit of the company’s creditors in the winding-up of the company; or
  • hindering, or significantly delaying, the process of making the property available for the benefit of the company’s creditors in the winding-up of the company.

A company can also be taken to make a disposition of the property where it does something that results in another person becoming the owner of property that did not previously exist – i.e. it constructs a building for another person.

If a company makes a disposition to another person and the other person gives some or all of the consideration for the disposition to a third party (i.e. to the director or a company or person related to the director), the company is taken to have made a disposition of the property to the extent of the consideration given to the third party.

A liquidator may be able to set aside a creditor defeating disposition if it was entered into, or some part of it was done, within a specified time period (approximately a year) before a company goes into voluntary administration or liquidation.[2]

The Australian Securities and Investments Commission (ASIC) can also make orders directing a person or company to transfer back to the company the disposed asset or an amount that ‘fairly represents’  the benefit that the person or company has received.[3]  Liquidators will be able to apply to ASIC to request ASIC to make such orders.  Not complying with an order of ASIC can result in substantial fines.

It is now an offence for a company officer to:

• engage in conduct which results in a company making;
• procure, incite, induce or encourage a company to make,

a creditor defeating disposition where:

• the company is insolvent or becomes insolvent because of the disposition; or
• the company goes into external administration or ceases to carry on business within 12 months of the disposition as a direct result of the disposition.

Company officers include not only directors but also persons who make decisions that affect the whole, or substantial, part of the business or company, or has the capacity to affect significantly the company’s financial standing.[4] 

Punishments for failing to comply with the amended provisions could result in up to 10 years in jail, fines up to nearly a million dollars, and compensation to be paid back to the company.

The amendments afford protection for dispositions which are undertaken as part of the course of action that is reasonably likely to lead to a better outcome for the company (and its creditors) by extending the Act’s safe harbour provisions (first introduced in relation to insolvent trading in 2017) to such dispositions.  This means directors that are making genuine efforts to turn around a financially distressed company are not punished.  For more information on safe harbour laws read our article here.

Director resignations

A director’s resignation will take effect only on the day that notice is lodged with ASIC unless the resignation was within 28 days prior to the notice being lodged, in which case it will take effect on the date of the resignation[5].  These amendments effectively mean a director’s resignation may only be backdated by a maximum period of 28 days, unless an application is made to the court or to ASIC.  

Due to a year long transition period for certain amendments, from 18 February 2021 company directors will no longer be able to resign if this will leave the company without a director[6], but a resignation will be effective if it provides it only takes effect on or after the day that the winding up of the company commences.^[7]  A similar provision provides that removal of a director through members’ resolution will be void if it leaves the company without a director.^[8]  This targets directors from avoiding responsibility by backdating resignations and holds individuals accountable for any misconduct whilst being the last sole director of a company.^[9]

New GST liability for directors

Along with making amendments to the Act, there will be changes to tax liabilities of directors.   Most importantly, directors will be personally liable to meet a company’s GST liabilities.  This amendment extends the previous obligations under which directors could be required to meet the company’s superannuation guarantee and PAYG obligations.[10]  As for PAYG obligations, if a company fails to pay GST but it lodges activity statements within three months of the due dates, the ATO can issue a Director Penalty Notice (DPN), but the directors can avoid liability by causing the GST to be paid, placing the company in liquidation or placing the company in voluntary administration, within 21 days of the DPN being issued.

If a company fails to pay GST and also fails to lodge activity statements within three months of being due, the ATO can estimate a company’s GST liability (if necessary) and issue a ‘Lockdown DPN’ making the director(s) liable for the company’s unpaid (including estimated) GST. 

The new liability for GST Director Penalty Notices will start to apply to the tax quarter starting 1 April 2020.  

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.