Phoenixing is when the controllers of a company deliberately avoid paying liabilities by shutting down an indebted company and transferring its assets to another company. It’s estimated that this illegal activity costs the Australian economy between $2.9 and $5.1 billion annually.[1] Phoenixing significantly impacts: Creditors who fail to receive payments for goods and services Employees through lost wages and superannuation entitlements The general public through lost revenue to the Government. Parliament has passed an Act that gives regulators such as ASIC and the ATO additional enforcement and regulatory tools to better detect and address illegal phoenix activity and to prosecute or penalise directors and others who facilitate this illegal activity, such as unscrupulous pre-insolvency advisers.[2] The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (the Act) – parts of which came into operation on 18 February 2020, with the remaining sections soon to take effect – comes as part of a comprehensive package of insolvency laws reforms put forward by the Federal Government. It amends the Corporations Act 2001 (Cth), the Taxation Administration Act 1953 (Cth) (TAA) and the A New Tax System (Goods and Services Tax) Act 1999 (Cth). Key provisions in the act The Act introduces a number of measures which aim to combat illegal phoenixing, including:[3] Strengthening enforcement options and penalties through introducing new criminal offences and civil penalty provisions to target those who conduct and/or facilitate illegal asset stripping. This is the transfer of company assets for less than market value (or the best price reasonably obtainable) that prevents, hinders or significantly delays creditors’ access to the company’s assets in liquidation. This is referred to in the Act as a ‘creditor-defeating disposition’. Introducing a new recovery power for ASIC and extending the recovery provisions available to liquidators. This is to enhance the recovery of assets lost through illegal asset stripping, for the benefit of employees and other creditors. Preventing directors from improperly backdating resignations to avoid liability or prosecution. 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. Limiting the ability of directors to resign when this would leave the company with no directors Extending the existing director penalty provisions to make directors personally liable for their company’s GST and related liabilities in certain circumstances. In a significant reform, the Commissioner of Taxation can now collect estimates of anticipated GST liabilities and in some circumstances make company directors personally liable for their company’s GST liabilities through the director penalty regime.[4] This amendment extends the previous obligations under which directors could be required to meet the company’s superannuation guarantee and PAYG obligations. The new provisions regarding GST liability will begin to apply to the tax quarter starting 1 April 2020. Expanding the ATO’s power to retain refunds if a taxpayer has failed to lodge a return or provide other information that may affect the amount of a refund. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund. The legislation is targeted towards those who misuse the corporate structure. It includes a number of important safeguards to ensure that the new laws do not effect honest businesses or genuine efforts to rescue a business in financial distress. Other potential reforms Separately, the Federal Government remains committed to introducing director identification numbers as part of its Modernising Business Registers reforms.[5] The Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2020 (Cth) (the Modernising Business Registers Legislation) was reintroduced to Parliament in December 2019 and is awaiting further debate. As part of the Modernising Business Registers Legislation, the Federal Government has proposed a new scheme to allocate a unique numerical identifier to each Australian director in an effort to further curb illegal phoenixing. If introduced into law, the scheme will require all current and future directors of Australian companies to confirm their identity and be issued with a Director Identification Number (DIN). The proposed scheme will allow traceability of a director’s relationship across companies. If the proposed scheme becomes law, it will be used to track directors across failed companies to combat repeated unlawful behaviour and further target illegal phoenixing activity. [1] https://www.aph.gov.au/Parliamentary_Business/Hansard/Hansard_Display?bid=chamber/hansards/9347d80c-bb0d-4c7a-945f-5c8c2f93a0fe/&sid=0013 [2] https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2Fce759aa1-47bf-467d-a58b-3bf640990032%2F0153%22 [3] https://ministers.treasury.gov.au/ministers/stuart-robert-2018/media-releases/coalition-continuing-combat-phoenixing [4] Division 269 in Schedule 1 to the TAA [5] https://www.abr.gov.au/media-centre/modernising-business-registers-and-director-identification-numbers
