Spotlight on phoenix activities
The new Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (“Act”) targets illegal phoenix activities by company officers, including directors. Phoenixing involves activities by company officers aimed at avoiding liability for company debt. An example of illegal phoenixing is where directors cause the transfer of assets of the original company for below-market value or no consideration to a new company. The original company is wound up, leaving behind unpaid taxes, creditors and employees, while the new company continues with the business under a different name, with the same management.
Summary of the main provisions of the Act
In summary, the key provisions of the Act that impact on directors are:
- New criminal offences and civil penalty provisions for company officers who fail to prevent the company from making creditor-defeating dispositions.
- Provisions enabling ASIC to recover company property disposed of or benefits received under a voidable creditor-defeating disposition for creditors’ benefit.
- Provisions preventing directors from improperly backdating resignations or ceasing to be a director when this would leave a company with no directors.
- Provisions enabling the Commissioner of Taxation to collect estimates of anticipated GST liabilities and to make directors liable for their company’s unpaid GST liabilities.
Director Penalty Notices (DPNs) may now be issued for unpaid/unreported GST
Directors would know that the ATO can issue a DPN for unpaid PAYG deductions and Superannuation Guarantee Charges (SGCs) for which directors may become personally liable.
The DPN regime now also applies to GST, Wine Equalisation Tax (WET) and Luxury Car Tax (LCT), with potential to make directors personally liable for unpaid amounts in certain circumstances.
After lodgement of an activity statement, the ATO may issue a 21-day GST DPN if the liability remains unpaid within three months of the due date. Directors must either pay the GST liability or place the company in administration or liquidation.
If a director causes a company to fail to lodge an activity statement within three months after the due date, the ATO can issue a Lockdown GST DPN. In such cases, the ATO may estimate the net amount of GST due and personal liability by a director cannot be avoided by placing the company in administration.
Additionally, the Commission of Taxation may withhold tax refunds to satisfy prospective tax obligations if the company fails to lodge a return or provide information about an estimated refund.
Additional powers to combat creditor-defeating dispositions
The reforms enable ASIC, either on its own initiative or upon application of a liquidator, to order the recovery of creditor-defeating dispositions of property.
Creditor defeating dispositions include property disposed for consideration that was less than market value, or the best price reasonably obtainable in the circumstances.
A creditor-defeating disposition’s effect must be ‘preventing the property from becoming available 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 recovery order can be made if the disposition was made while the company was insolvent, or if the disposition caused the company’s insolvency, or if the disposition was made 12 months before the company entered administration or liquidation.
New criminal offences and civil penalty provisions
The amendments to the Corporations Act 2001 introduce criminal offences and civil penalties for directors and other persons that fail to prevent creditor-defeating dispositions.
The inclusion of ‘other persons’ who must not procure, incite, induce or encourage the company to make such a disposition has potential to expose professionals such as lawyers, accountants and insolvency advisors to liability.
Defences may be available for the newly introduced offences or penalties, such as legitimate restructuring activities or transactions under a deed of company arrangement or scheme of arrangement.
The safe harbour provisions presently in place for offences under insolvent trading provisions will also apply.
Restrictions on resignations – improving the accountability of directors
The Act restricts directors from improperly backdating resignations and preclude a single (last) director of a company from resigning or being removed by a resolution of members, unless the company is being wound up.
The provisions aim to prevent resignations obscuring a director’s involvement in company decisions or shifting accountability to other directors, in particular, ‘paper’ directors who have no real involvement in the management of the company.
Resignations reported to ASIC more than 28 days after the ‘purported resignation’ will now take effect on the day of lodgement unless the company or a director applies to ASIC or the Court to fix the purported date of resignation.
Directors should comply with their GST and other reporting requirements to minimise the risk of personal liability for unpaid amounts. Business Activity Statements should be lodged within the required timeframes and professional advice sought by directors if a company is facing insolvency or other issues likely to expose them to liability.
Directors in receipt of a DPN should seek urgent advice on their options to avoid personal liability or to lodge a defence.
Directors should contact their insurance brokers to establish whether their current Directors and Officeholders policy covers the new liability created by the Act.
This article is intended to provide general information only. You should obtain professional advice before you undertake any course of action.
If you or someone you know wants more information or needs help or advice, please contact us.