New laws are now in place to target illegal phoenixing of companies which by some estimates costs businesses, employees and governments more than $2bn a year. At its core, illegal phoenixing is the use of serial deliberate insolvency as a business model to avoid paying company debts.
To combat this, the new laws are set target a range of behaviours including preventing property transfers to defeat creditors, improving accountability of resigning directors, allowing ATO to collect estimates of anticipated GST liabilities, and authorising ATO to retain tax refunds.
Many of you have heard of illegal phoenixing but are not sure of what exactly it encompasses. While there is no legislative definition of illegal phoenixing or phoenixing activity, at its core, it is the use of serial deliberate insolvency as a business model to avoid paying company debts. In a report in 2018, it is estimated that potential illegal phoenixing has an annual direct cost to businesses, employees and governments of between $2.85bn and $5.13bn.
It is no wonder then the government has been on the war path to stamp out the practice. Specific measures targeting illegal phoenixing has recently been passed to prevent property transfers to defeat creditors, improve accountability of resigning directors, allow ATO to collect estimates of anticipated GST liabilities, and authorise ATO to retain tax refunds in certain circumstances.
Property transfer to defeat creditors
New criminal offences and civil penalty provisions will apply to company officers that fail to prevent the company from making “creditor-defeating dispositions” and other persons (including pre-insolvency advisers, accountants, lawyers, other business advisers etc) that facilitate a company making a “creditor-defeating disposition”.
Liquidators and ASIC can seek to recover the assets for the company’s creditors, and in some cases, creditors can recover compensation from a company’s officers and other persons responsible for making a “creditor-defeating disposition”.
A “creditor-defeating disposition” is defined as a disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering, or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up. To ensure legitimate businesses aren’t affected by this wide definition, safe habour for genuine business restructures and transactions made with creditor or court approval under a deed of company arrangement has been maintained.
Improve accountability of resigning directors
In order to reduce the instances of unscrupulous directors using loopholes to shift the blame, the new laws seek to prevent abandonment of companies by a resigning director or directors, leaving the company without a natural person’s oversight. Practically, under the new laws, a director cannot resign or be removed by a resolution of company members if doing so would leave the company without a director (unless the company is being wound up).
In addition, if the resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation is deemed to take effect from the day it is reported to ASIC. However, a company or director may apply to ASIC or the Court to give effect to the resignation notwithstanding the delay in reporting the change to ASIC.
Collection of anticipated GST liabilities
Under the new laws, the Commissioner of Taxation can now collect estimates of anticipated GST liabilities (including LCT and WET liabilities). The Commissioner can also recover director penalties from company directors to collect outstanding GST liabilities (including LCT and WET) and estimates of those liabilities.
The new laws allow the Commissioner to retain a refund to a taxpayer that has other outstanding lodgements or information that needs to be provided.
Going through a restructure or winding up of your business?
Make sure you’re not caught out by these new measures if you’re going through a legitimate restructure or winding up of your business. Hunter Partners can help you organise and meet all the legal requirements with the relevant authorities. Contact us now on (07) 4723-1223.
Hunter Partners are Accountants, Tax Agents and Financial Planners. We can assist you with all aspect of your accounting, tax and financial planning requirements, call Hunter Partners on (07) 4723-1223.