Proposed Changes to Corporations Act (Phoenix Activity) and Taxation Act (Director Penalty)

22 Jun 2012

PHOENIX ACTIVITY

The Federal Government considers “fraudulent phoenix activity” to be situations where a director intentionally transfers assets of a company (“transferor”), at a reduced or nominal value, to a new company controlled by that director (or his/her nominees) which effectively denies creditors access to those assets to pay the debts of the transferor company.

The Government’s interpretation of “Phoenix Activity” exists whether or not an insolvency practitioner has been appointed to the transferor.

There is no specific provision in the Corporations Act, 2001 (“the Act”) which makes phoenix activity “illegal”. However, directors should be warned that involvement in “fraudulent phoenix activity” can have serious consequences if it is found that the directors breached Sections 180 to 183 inclusive of the Act.

Federal Government Proposed Action

Similar Names Legislation

To further deter “fraudulent phoenix activity”, the Federal Government has introduced the “Corporation Amendments (Similar Names) Bill 2012”. This proposed legislation has yet to be introduced to Parliament.

In summary, the proposed legislation incorporates the following:

• Makes directors of a “new” company liable for unpaid debts of the “new” company if:

a) They were also directors of a “failed” company during the twelve (12) months preceding the winding up of the “failed” company; and

b) The “failed” company has unpaid debts; and

c) The “new” company is known by a name that is the same or similar name to the “failed” company; and

d) The debt was incurred by the “new” company within five (5) years of the winding up of the “failed” company.

• A director of a “new” company is liable jointly and severally with the “new” company;

• The same or similar name extends to a name by which the “failed” company was known. The name by which the “failed” company was “known” extends to business and trading names, whether registered or not;

• Directors may avoid liability under the proposed legislation in certain circumstances, such as

a. The director(s) obtain an Order from the Court or a declaration from the Liquidator of the “failed” company exempting them from liability if they can establish they acted honestly and having regard to the circumstances of the case, the director ought to be exempt from liability for the debts of the “new” company. The circumstances which the Court or Liquidator must have regard to include the following:

i) Extent to which assets of the “failed” company have become assets of the “new” company;

ii) Extent to which employees of the “failed” company have become employees of the “new” company;
iii) Whether there were reasonable grounds to expect that the “failed” company was solvent when it incurred a debt (at a time when that director was a director of the “failed” company);
iv) Extent to which the premises used by the “failed” company had become premises used by the “new” company;
v) The extent to which the new company has used telephone numbers, email addresses and web domain names of the “failed” company;
vi) Whether any act has been done, or omitted to be done, by the directors of the “new” company that is likely to create a misleading impression that the “failed” company and “new” company are the same entity.

b. Where the “new” company was carrying on business in the twelve (12) month period before the commencement of the winding up of the failed company.
The current drafting is unclear as to whether the “new” company must be in liquidation for the director liability to be enforceable.

The above is a timely reminder to directors and their advisers to be prudent in their dealings when a company may be insolvent (or at risk of insolvency) particularly if they are considering the transfer of the business/assets of their company in such a manner that may be prejudicial to any creditors of the “failed” company.

If you require further details on the proposed legislation, please contact our office.

Phoenixing and Other Measures Legislation

The ASIC have also pushed ahead further changes to deter phoenix activity, which are contained in the “Corporations Amendment (Phoenixing and Other Measures) Bill, 2012”, which was passed by Parliament on 9 May 2012 and is awaiting Royal assent.

A summary of the key features of the new legislation is as follows:

• Commences 1 July 2012;

• Enables ASIC to order the winding up of companies abandoned (whether deregistered or not) by directors and to appoint a Liquidator to those companies;

• The appointment of a Liquidator to abandoned companies enables the Liquidator to investigate whether any phoenix activity has occurred and also to allow former employees to access their entitlements under the Federal Governments’ General Employee Entitlements and Redundancy Scheme (“GEERS”);

• From 1 July 2012, ASIC will maintain a website (http.//insolvencynotices.asic.gov.au) which will contain all insolvency notices previously published in newspapers and the Commonwealth Business Gazette.

The publication of insolvency notices on the new ASIC website is aimed at reducing costs as well as provide a central reference site for interested parties to obtain information on corporate insolvency matters without charge. Insolvency related Company notices will no longer be required to appear in the newspaper.

Tax Changes – Expansion of Director Liability Provisions

In our September 2011 Newsletter, we outlined the proposed changes to the Director Penalty Provisions contained within the Taxation Administration Act, 1953 (“TAA53”). Our September 2011 Newsletter, indicated that the changes to the law may be in effect by November 2011.

Following pressure from various interest groups, the Government withdrew the proposed legislation from Parliament in November 2011 to enable further consultation. In April 2012, the Government re-released the proposed changes to the TAA53 for public consultation.

In summary, the proposed changes cover the following areas:

• Expanding the Director Penalty regime to include Superannuation Guarantee Charge (“SGC”) amounts;

• The ATO may, in addition to serving a director at their address per the ASIC database, serve a copy of the Director Penalty Notice (“DPN”) on the director at his/her tax agents address;

• Where PAYG Withholding and SGC amounts remain unreported and unpaid three (3) months after the due date, directors will not have their Director Penalties discharged by placing the company into administration or liquidation.

• In all instances, the ATO will issue a DPN and must wait 21 days before commencing recovery. (It was previously proposed that the ATO could commence proceedings without issuing a DPN in certain cases).

• Restricting access to directors and their associates (as defined) from obtaining taxation credits for PAYG withheld amounts in their personal taxation returns where the company has failed to pay the withheld amounts to the Commissioner.

We will further report on the proposed legislation once it becomes law.