Legislation update

Legislation to combat illegal phoenix activity

05 September 2018
4 min.
read
Worthwhile read for: Company Directors, Company Officers, Liquidators

Key issues

  • On 16 August 2018, the Minister for Revenue and Financial Services released a package of proposed insolvency reforms aimed at combating illegal phoenixing activity. 
  • The proposed reforms are in line with the measures announced in the 2018 Federal Budget. 
  • The legislation is tightly targeted at those who misuse the corporate form, while minimising any unintended impacts on legitimate business restructuring.

Phoenixing occurs when the controllers of a company strip the company's assets and transfer them to another entity in order to avoid paying the original company's debts. Such transactions are carried out by a company’s directors or other controlling parties with the intention of defeating the interests of the original company’s creditors in that company’s assets. Such transactions may also be facilitated by others, including unscrupulous pre-insolvency advisers, accountants, lawyers or other business advisers, who advise companies.

The Phoenixing Taskforce recently published a report that estimates the cost of illegal phoenixing to the Australian economy at between $2.85 billion and $5.13 billion in 2015-2016.

A summary of the key features of the Exposure Draft to the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018 can be seen below.

  • Schedule 1 to the Exposure Draft amends the Corporations Act 2001 to improve the mechanisms available to combat illegal phoenix activity, specifically creditor-defeating dispositions- transfers of company assets that prevent, hinder or significantly delay creditors’ access to the company’s assets in liquidation. In particular, the amendments introduce new offences for company officers that fail to prevent the company from making creditor-defeating dispositions and other persons that facilitate a company making a creditor-defeating disposition.
  • The offences will be supported by an extension of the existing liquidator asset clawback avenues to cover illegal phoenix transactions.
  • To protect creditors, these amendments make a number of refinements to the corporations law to allow for the efficient recovery of assets and, where necessary, the provision of compensation. In particular, the amendments provide that liquidators can seek to recover the assets or other consideration through the courts for the benefit of the company’s creditors. ASIC can make orders to recover assets for the company’s creditors and liquidators and, in some cases, creditors can recover compensation from a company’s officers and other persons responsible for a company making a creditor-defeating disposition.
  • The amendments ensure ASIC has power to take effective action against illegal phoenix activity and protect the interests of legitimate creditors.
  • The amendments grant ASIC specific powers to make administrative orders to recover property the subject of voidable creditor-defeating dispositions. ASIC may use these powers to recover property for a company in liquidation on its own initiative or on the application of a liquidator.
  • Schedule 2 ensures directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors.
  • Schedule 3 allows the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances. This represents a major change to the risk profile of a company director. Non-payment of GST may occur as a result of a number of non-sinister reasons. Be that as it may, however, such inaction may now result in a director being personally liable for the unpaid GST.
  • Schedule 4 authorises the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the Commissioner refunds. 
  • This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

The consultation period for the Draft Legislation is now closed. 

For more information or discussion in relation to the new phoenix legislation, please contact HopgoodGanim Lawyers’ Taxation or Private Enterprise teams.

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