Final Act: New laws cracking down on Illegal Phoenixing

What is it?

Illegal phoenixing involves the transferring of an entity’s assets, thereby denying creditors’ access to those assets to meet unpaid debts.  This usually happens when company directors transfer the assets of an existing company to a new company without paying true or market value, leaving debts with the old company.

The old company is placed into liquidation, however no longer has any assets of value. The directors in the meantime carry on trading under a new company name, thus giving the business unfair advantage.

Who does it affect?

Illegal phoenix activity hurts sub-contractors, creditors and employees as they are left unpaid and out of pocket.

Changes to the existing law

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth) (Act) came into operation on 18 February 2021, designed to give regulators greater powers to detect and combat this illegal practice. In particular, these amendments are designed to crack down on directors who actively seek to avoid paying creditors and employees and dodgy pre-insolvency advisors who recommend and facilitate illegal phoenixing.

Key highlights

The key measures introduced are:

  • strengthening enforcement options through the introduction of new phoenix offences and civil penalty provisions, carrying the highest penalties available under the law, to target both those who conduct or facilitate illegal phoenixing;
  • introduction of a new recovery power for ASIC, and extending the recovery provisions available to liquidators, to improve their ability to recover assets lost through illegal phoenixing;
  • preventing directors improperly backdating resignations, or ceasing to be a director, when this would leave the company with no directors to avoid liability or prosecution;
  • extending the director penalty provisions to allow the Commissioner to collect anticipated GST and related liabilities thus making directors personally liable for these liabilities;
  • expanding the ATO’s power to retain refunds where there are outstanding tax lodgements; and
  • protecting the interests of legitimate businesses when restructuring or attempting to turn around a financially distressed business by protecting transfers of property made when the directors are in a safe harbour against insolvent trading.

Creditor defeating dispositions

The Act introduces a new concept known as a creditor defeating disposition.  A disposition of property of a company is a creditor-defeating disposition if:

  • the consideration payable to the company for the disposition was less than the lesser of the following:
  • the market value of the property;
  • the best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time; and
  • the disposition has the effect of:
  • preventing the property from becoming available for the benefit of the company’s creditors in the winding-up of the company; 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.

Director resignations

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.  These amendments effectively mean a director’s resignation may only be backdated by a maximum period of 28 days, unless an application is made to the court or to ASIC.

New GST liability for directors

Along with making amendments to the Act, there will be changes to tax liabilities of directors.   Most importantly, directors will be personally liable to meet a company’s GST liabilities.  This amendment extends the previous obligations under which directors could be required to meet the company’s superannuation guarantee and PAYG obligations.

The new liability for GST Director Penalty Notices will start to apply to the tax quarter starting 1 April 2020.

We can help

If you need advice on winding down or closing a business, contact our Concierge today.