Changes to laws to combat phoenix activity  

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Phoenix Act) received royal assent on 17 February 2020 and has made subtle but significant and critical changes to the Corporations Act 2001 (Cth) (Corps Act), A New System (Goods and Services Tax) Act 1999 (Cth) and the Taxation Administration Act 1953 (Cth).

The purpose of the Phoenix Act is to provide regulators with greater powers to “detect and disrupt phoenix activity, and to prosecute directors and other professional advisors who engage in or facilitate the activity.”[1]

In this Limelight, we discuss the changes introduced by the Phoenix Act and their implications.

Illegal Phoenix activity impacts all facets of the business lifecycle

Illegal phoenix activity is when a new company is established to continue the business of an old company which has been deliberately liquidated to avoid paying its debts including taxes, creditors and employees. Illegal phoenix activity impacts the business community, employees, contractors, the government and the wider community through:

• non-payment of wages, superannuation and accrued employee entitlements;
• gaining an unfair competitive advantage over other businesses by phoenix operators “undercutting” competitors due to their artificially low-cost structures;
• non-payment of suppliers;
• loss of government revenue (income tax, GST and payroll tax) and increased monitoring and enforcement costs; and
• avoidance of regulatory obligations.

Phoenix Activity is complex, but can be divided into the following types[2]:

Indicators of Phoenix activity

Insolvency practitioners (and their lawyers) are routinely asked to unravel the “web” of suspected phoenix activity in appointments taken over corporations which have been “stripped” of assets prior to their appointment. Corporations should be alive to some of the indicators of illegal phoenix activity, which includes:

• Separate project-based entities which are wound-up at project conclusion, moving company assets out of the corporation and only leaving behind unpaid creditors[3];
• Entering contracts through one corporate vehicle and receiving payment for the contracted works into a separate corporate vehicle;
• “Straw” directors (for example, spouses, friends or vulnerable citizens) are named as the directors of the corporation with their role limited to a name, signatory and following directions from the real “controlling mind” of the corporation; and
• “Restructures” of the contracting corporate vehicle whilst project works (pursuant to a contract) remain “on foot” with no variations proposed by contracting corporate vehicle to underlying contracts.

The estimated cost of phoenix activity is in the billions of dollars; however, the actual cost is likely to be much greater due to the limitations on the extent to which data is collated and analysed[4]. Specifically, data is only collected based on corporations that “fail” in their phoenixing activity, as the related entities fall into insolvency and insolvency practitioners take steps to “unwind” the phoenix and report such investigations to the regulators.

Phoenix Act

The changes introduced by the Phoenix Act include:

1. Directors are now personally liable for the Company’s taxation obligations
   This includes the Company’s GST, PAYG withholding amounts (including estimates) and superannuation guarantee charges (including estimates). Director Penalty Notices (DPNs) may be issued for these amounts from 1 April 2020[5].
2. Corporations must satisfy outstanding taxation obligations (including estimates) before being entitled to a tax refund[6]
3. “Creditor defeating dispositions”[7] of property have been introduced and are illegal
   Company officers now have a duty to prevent creditor defeating dispositions, they can be unwound by an order of the Australian Securities and Investment Commission (ASIC), on the request of a liquidator, pursued as a debt against the person involved, and carry serious sanctions for breach including up to 10 years imprisonment[8].
4. Changes to directorship of a Company will only take effect on the day it is lodged with ASIC, unless the resignation was within 28 days prior to the lodgement
   This  means that a director’s resignation may only be backdated a maximum period of 28 days, unless an application is made to the Court or to ASIC[9].
5. Resignation from directorship of a Company will not be permitted if it will leave the Company without a director
   Such a resignation will only be effective if it takes effect on or after the winding up of the Company.[10]

Implications

 The prevalence of illegal phoenix activity is expected to rise in the wake of the economic climate impacted by COVID-19. Noting this, together with the recent introduction of the Phoenix Act:

• Directors should be acutely aware of their duties as directors of a Company (sections 180-183 of the Corps Act) together with their obligation to prevent insolvent trading (section 588G of the Corps Act, temporarily varied by the Coronavirus Economic Response Package Omnibus Act2020 (Cth)[11]), which are expanded further by the Phoenix Act to “prevent creditor defeating dispositions of property”[12].
• Directors should be aware of the expansion to the DPN framework together with the implications for cash-flow management noting that taxation liabilities must now be met prior to receipt of any refunds from the ATO.
• Creditors of a Company should be aware of the indicators of phoenix activity, actively engage with their lawyers and accountants to ensure that adequate security is in place to secure the Company’s contractual obligations, ensure payment terms with the Company are carefully monitored and contractual agreements with the Company are updated to reflect any changes to contracting.
• Advisors of corporations, including lawyers and accountants, should be cognisant of their involvement in any “creditor defeating dispositions” of Company property which may fall foul of section 588GAC of the Corps Act but also may be construed as an “aiding, abetting, counsel or procuring” contravention pursuant to section 79 of the Corps Act.

This publication constitutes a summary of the information of the subject matter covered. This information is not intended to be nor should it be relied upon as legal or any other type of professional advice. For further information in relation to this subject matter please contact the author.

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© Gilchrist Connell 2017

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