March 2020: Illegal phoenixing - the next chapter

March 2020

Introduction

The Federal Government has over the last few years been implementing a number of changes into the corporate insolvency regime, with a particular focus on addressing what it has identified as ‘illegal phoenixing activity’ (Illegal Phoenixing).

At its essence, Illegal Phoenixing is activity undertaken by persons with respect to a corporate entity that involves the deliberate stripping/ transferring of assets from that entity in order to avoid or minimise payment of liabilities. Another common trait of Illegal Phoenixing is that the transferred assets end up in the control or possession of another corporate entity which is associated with the directors or shareholders of the original entity.

Latest measures to combat Illegal Phoenixing

On 17 February 2020, Royal Assent was given to the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 (Bill) with the result that the measures contained in the Bill are now in force.

Highlighted in this article are three of the main changes arising from the Bill.

GST added to DPN regime – 1 April 2020 onwards

This change to the Director Penalty Notice (DPN) regime is anticipated to have potentially significant repercussions for all directors, as it widens the company liabilities that the Deputy Commissioner of the Australian Taxation Office (ATO) can enforce a personal liability against directors in respect of.

All GST amounts for the quarter starting on 1 April 2020 and going forward will be added to the DPN regime. Additionally the ATO is now able to make estimates of anticipated GST liabilities and to issue DPNs on those estimates.

GST amounts will be treated in the same fashion as PAYG withholding (PAYGW) amounts, in that they can fall within the ‘Ordinary’ or the ‘Lockdown’ DPN regime, depending upon the relevant entity’s reporting behaviour.

‘Ordinary’ DPNs relate to liabilities which are unpaid but have been reported to the ATO. Save for very limited defences, personal liability can only be avoided if, within 21 days after service of the DPN, the director causes the company to do one of the following:

·       appoint an administrator or liquidator;

·       pay the whole of the outstanding amount; or

·       enter into a payment plan.

‘Lockdown’ DPNs relate to liabilities which are both unpaid and unreported within specified time periods. For PAYGW and GST liabilities, that period is within 3 months of the relevant ‘due date’ for the liability. Save for very limited defences, personal liability can only be avoided if, within 21 days after service of the DPN, the directors cause the company to do one of the following:

·       pay the whole of the outstanding amount; or

·       enter into a payment plan.

The changes also expand the present estimates regime, allowing the ATO to also make estimates of the GST amounts for an entity which has failed to lodge its returns. The ATO would therefore be able to make an estimate of an entity’s net amount of liability, calculated by reference to the amount of GST imposed on that entity less its input tax credits.

The same reforms also apply to luxury car tax and wine equalisation tax.

Creditor-defeating transfers of company assets – 18 February 2020 onwards

A new form of voidable transaction claim has been added to the Corporations Act 2001 (Cth) (Corporations Act), which allows claims to be made in circumstances where a disposition of property of a company occurs:

·       within 12 months prior to the ‘relation-back day’ (which may be much earlier than the date of the appointment of the liquidator) and the company was insolvent at the time, or became insolvent as a consequence of the disposition of property; and

·       the consideration payable to the company was less than the lower of the market value of the property, or the best price reasonably obtainable for the property having regard to the circumstances existing at the time of the transfer.

There are also civil and criminal offences that are available to be brought against the following persons in the event of a creditor-defeating transaction occurring:

·       company officers who fail to prevent the company from undertaking such transactions; and

·       other persons who facilitate a company who undertakes such a transaction, including professional advisors.

Criminal penalties apply in circumstances where there has been recklessness as to the result of the conduct associated with the relevant transaction, i.e. that there is an awareness that there is a substantial risk that a creditor-defeating transaction will arise as a result of the conduct undertaken. 

Civil penalties apply if it is shown that a reasonable person would know that the result of their conduct would be a creditor-defeating disposition occurring.

Given the central concept of the company’s solvency in the context of these changes to the legislation, it is critical to be aware that a presumption of insolvency applies if a company has failed to keep adequate financial records. Should this be the case, a defendant to any such claim would need to prove the solvency of the company, which can, of itself, impose a significant burden on a defendant.

Restrictions on director changes – 18 February 2021 onwards

With a view to improving the accountability of resigning directors, the Bill has also made changes to the Corporations Act that has implemented the following restrictions on director changes:

·       a resignation of a director, or resolution for removal of a director, is ineffectual if the company does not, at the end of the day upon which the resignation or removal is to take effect, have at least one director; and

·       resignation of a director will only take effect on the day that person stopped being a director of the company if the relevant ASIC notification is made within 28 days after that date. If this does not occur, the resignation is not (absent an application to Court or ASIC being made) effective until the date that the relevant ASIC notification is lodged.

The effect of these changes means that absent a replacement director being appointed, or otherwise timely lodgements with ASIC being made, notwithstanding the purported resignation or removal of the existing director they will remain a director and remain subject to all of the duties, obligations and liabilities of a director.

Given the myriad of personal liabilities that may accrue to a director, it is therefore critical that resigning/ removed directors and their advisors ensure that the purported resignation or removal is effective on the date that it occurs.

The contents of this article are intended to provide only a general summary on matters of interest and are not comprehensive, nor does this article constitute legal advice. You should seek legal or other professional advice before acting or relying on any of the content of this article.