Alert to Advisors - Potential Personal Liability

The Treasury Laws Amendment (Combating Illegal Phoenxing) Bill 2019 (“the Bill”), received Royal Assent on 17 February 2020.

The Bill aims to curb the increasing incidence of illegal phoenix activity, by introducing a new type of voidable transaction (“creditor defeating dispositions”) and making it easier to target the dodgy “pre-insolvency advisers” who facilitate these transactions.

Phoenixing Offences and Other Property Transfers to Defeat Creditors

Schedule 1 of the Bill came into effect on 18 February 2020.  Company Officers and their advisors will be liable if they fail to prevent a company from making creditor-defeating dispositions (defined in Corporations Act (“CA”) Section 588FDB) of company property.

A creditor-defeating disposition is a transfer of a company’s property for less than market value or the best price attainable at the time of the disposition (CA588FDB).

“Market Value” means the price that would be paid in a hypothetical transaction between a knowledgeable and willing, but not anxious, seller to a knowledgeable and willing, but not anxious, buyer, who transact at arm’s length.

The alternative test of “the best price reasonably obtainable” recognises there will be situations where a company may need to realise assets at less than market value.

If the Company fails to keep proper and adequate books and records relating to the disposition, it is presumed that the disposition was not for market value.

A liquidator is able to apply to a Court for an order voiding creditor-defeating dispositions (included in CA 588E).  

Similarly, ASIC may make administrative orders to recover (for the benefit of company’s creditors) company property disposed or benefits received under a voidable creditor-defeating disposition (CA 588FGAA).

Such action may be taken by ASIC on its own initiative or on the application of a Liquidator.

ASIC’s powers are directed at the entities that receive (or ultimately receive) the benefit of a voidable creditor defeating disposition.

The transaction must be within twelve (12) months of the commencement of the winding up and must be when the company is insolvent or becomes insolvent as a result of the disposition or enters into external administration (or ceases to trade) within twelve (12) months of the transaction (CA 588FE(6B)).  The provisions apply to transactions entered into after 17 February 2020.

Who May Be Liable

An officer of a company must not engage in conduct that results in a creditor defeating disposition and breaches of Section 588FE(6B). (CA 588GAB).

In addition, CA 588GAC(1) provides that a person must not engage in conduct of procuring, inciting, inducing or encouraging the making by a company of a disposition of property.

This Section is aimed at dragging into the net shadow directors and advisers to the company or its directors.

The new provisions, allow for both criminal and significant civil penalties to apply to these company officers and advisors.

Action may be taken against those involved in illegal phoenix activity (of stripping the Company’s assets) and abandoning the Company.  Rather than establishing insolvency at such time, the Liquidator will simply need to establish the date a company ceased to carry on business and that assets were stripped.

Defences similar to those currently applicable to voidable transaction offences exist, however they do not apply where the Company enters into external administration within twelve (12) months of an illegal phoenix transaction (creditor defeating disposition) as it is unnecessary to prove insolvency.

Resigning Directors

Schedule 2 of the Bill comes into effect on 18 February 2021 (CA 1661).

It has been increasingly common for directors to backdate their resignation of director form with ASIC, in an attempt to avoid accountability for misconduct.

Once the bill comes into affect directors will have twenty-eight (28) days to lodge their notice of resignation with ASIC, otherwise, resignation will take effect from the date that the notice is lodged with ASIC.

NOTE: ASIC will not accept nor action a notice of resignation if doing so will leave the company with no director.

GST Estimate and Director Penalties

Schedule 3 of the Bill applies to tax periods from 1 April 2020.  It does not apply to amounts outstanding prior to this date.

The Commissioner will be able to make an estimate of the net GST payable to the ATO if returns are not lodged.  The ATO may issue a Director Penalty Notice (“DPN”) based on the estimate.

The Company is liable to pay that estimate to the ATO.  Directors have twenty-one (21) days from the date of the notice to ensure that either payment is made or they appoint an administrator or liquidator. Failure to take action will render the director personally liable to the estimated debt (Section 268 of Tax Administration Act, 1953).

This is similar to the existing DPN process for PAYG and Superannuation.

In the event that a GST return is not lodged within three (3) months of the due date, an issued DPN will be “locked down”.  The appointment of an insolvency practitioner to the company, will not remit the director’s penalty once the debt is “locked down”.
 
These obligations continue to apply to directors who resign, in relation to all tax periods prior to their resignation where amounts continue to be outstanding.

Obligations in relation to past tax periods, will be imposed on new directors thirty (30) days after their appointment.

Passive Directors

All directors are covered by these and existing DPN provisions.

Directors who do not take an active role in the day-to-day activities of a company should, at least, make themselves aware of the Company’s lodgement and payment position with the ATO, and act or seek advice where debts and / or lodgements accrue.

Retention of Tax Refunds

Schedule 4 of the Bill came into effect on 1 April 2020.
The Commissioner is authorized to retain tax refunds where a taxpayer has failed to lodge a return or provide other information to the Commissioner that may affect the amount of the refund.  (Section 8AAZLG of the Tax Administration Act 1953.)