By Kirsten Farmer, Partner and Jeremy Mackenzie, Partner
The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Act) came into operation on 18 February 2020, and is intended to assist ASIC and liquidators to ‘detect and disrupt phoenix activity, and to prosecute directors and other professional advisors who engage in or facilitate the activity’.
The Act has made significant changes to the Corporations Act 2001 (Cth), as well as the GST Act 1999 (Cth) and the Taxation Administration Act 1953 (Cth). The Act introduces new measures to assist in combating phoenix activity including:
- introducing new phoenix offences and civil penalty provisions for phoenix and ‘creditor-defeating dispositions’;
- attaching personal liability to directors for GST and related liabilities;
- holding directors accountable for improper back dating of resignations or resigning in circumstances where there are no remaining directors within the company; and
- allowing the ATO to collect estimates of anticipated GST liabilities and extend its power to retain tax refunds where there are outstanding tax lodgments.
The Act has introduced new phoenixing offences and measures which seek to prohibit asset transfers designed to defeat creditors. These activities are referred to in the Act as ‘creditor-defeating dispositions’ and encompass any disposition of property where the consideration paid to the company is taken to be less than the market value or the best price reasonably obtainable and 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.
Creditor-defeating dispositions will be deemed a voidable transaction if certain criteria regarding the solvency of the company are met. A transaction may be voidable if it is a creditor-defeating disposition and:
- is made when the company is insolvent; or
- it is because of the disposition that the company becomes insolvent; or
- enters into external administration within the following 12 months.
The amendments do however, afford protection for dispositions undertaken to seek to achieve a better outcome for the company and its creditors, this is achieved by extending the safe harbour provisions to include such dispositions. Notwithstanding, the Law Council of Australia and the Law Reform Commission have expressed concern over the extended powers which the Act confers to unwind transactions. Concerns have been raised that the powers under the Act could be unconstitutional and could hamper legitimate restructuring efforts. We will no doubt see greater consideration of these issues as these powers are utilised.
The Act increases the accountability of directors for misconduct by preventing directors from back dating resignations (now limited to a maximum of 28 days) and resigning in circumstances where doing so would leave the company without any directors.
Retention of tax refunds and GST liability for directors (commences on 1 April 2020)
The Act imparts personal liability on directors for GST and related liabilities and extends the power of the ATO to collect estimates of anticipated GST liabilities and enforce personal liability on directors for these monies. This bears similarity to the existing director penalty regime with respect to PAYG and superannuation.
These measures have been implemented to ensure accountability and reduce phoenixing activity.
It is not yet known whether the amendments will be effective in minimising phoenix activity but the changes to the Act make it increasingly difficult for directors to avoid personal liability and provide new opportunities for liquidators’ actions against those directors or officers engaging in phoenix activity.
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