After the amendment bill lapsed prior to the federal election, laws to further combat illegal phoenixing have now commenced operation on 18 February 2020 under the Treasury Laws Amendment (Combat Illegal Phoenixing) Act 2020 (Cth). The implementation of this act aims to deter and disrupt illegal phoenixing and more harshly punish those who engage in and facilitate this behaviour.
What is Illegal Phoenixing?
Illegal phoenixing is the practice of moving all the assets of a company into another company with the intention of defeating the interests of the first company’s creditors. The directors of the first company will transfer assets to a new company without paying the true value for those assets, leaving the debts behind with the first company.
When the first company is placed into liquidation, there are no assets left to sell, so creditors cannot be paid. The first company’s business then ‘rises from the ashes’ to be carried on by the same persons under a new name (which is usually, a similarly named company).
In the past, illegal phoenixing has been used to avoid obligations to creditors who may include employees, trade creditors and the Australian Tax Office.
Difference Between Illegal Phoenix Activity and a Legal Phoenix Company
Phoenix activity is addressed by a suite of legislation, particularly in tax and corporations law. However, phoenix activity has not been previously specifically prohibited. As there is no specific prohibition, typically illegal phoenix activity involves some other breach of the law, such as non-compliance with director’s duties or fraud.
A legitimate business rescue, or incompetent management continually seeking to resurrect its business, is not, strictly speaking, illegal. Therefore, a responsibly managed company that has complied with their legal obligations and acted in the best interests of the company and its creditors does not constitute illegal phoenix activity.
The key difference between the two scenarios is the director’s dishonest intentions. Where a director(s) sets out to intentionally avoid paying liabilities, by transferring assets to another company in absence of their true market value, then the conduct is illegal.
Amendments
The new laws implemented a host of changes including the following:
- Introducing new phoenixing offences which target those who engage in illegal phoenix activity and allow liquidators and ASIC to recover company assets disposed of under such activity.
- Increased accountability of directors for misconduct by preventing directors from improperly backdating resignations to avoid personal liability.
- Preventing directors from ceasing to act when this would leave the company with no directors.
- Making company directors personally liable for their GST liabilities in certain circumstances.
- Allowing the ATO to retain tax funds where a taxpayer has failed to lodge a tax return therefore ensuring taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a refund.
The penalties for contravention of the above are significant (and which includes possible criminal conviction).
If you would like advice or assistance in relation to any Commercial matters, please contact our accredited business law specialists and Partners Justin Thornton on jthornton@marsdens.net.au and Rahul Lachman on rlachman@marsdens.net.au or otherwise by calling them on (02) 4626 5077.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.
