By Michelle Viscardi

Canberra has fired a blast at unscrupulous directors and business advisers, passing tough new anti-phoenixing laws in February 2020.

Under the new laws, directors and third parties – including accountants and financial advisers – found responsible for illegal phoenixing activity could face criminal charges, fines of up to A$200,000, and have compensation orders made against them personally. Directors will be liable to pay their company’s GST debts.

The Australian Securities and Investments Commission (ASIC) describes phoenixing as “where a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes, creditors and employee entitlements”.

That can have a devastating impact on creditors. They are left high and dry, with no avenue to recover their debts. Some may end up facing insolvency themselves as a result.

A July 2018 report by PwC, The Economic Impacts of Potential Illegal Phoenix Activity, estimated that deceitful phoenixing robs employees of between A$31 million and A$298 million in unpaid entitlements each year and costs the government about A$1.7 billion in unpaid taxes and compliance costs annually.

When is a transfer of assets illegal?

The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 targets the transfer of company assets, which is one method used to make a company insolvent. It refers to this activity as “creditor-defeating dispositions”.

The laws prohibit the dissipation of company property to the disadvantage of creditors, and grants powers to ASIC and liquidators to recover such property.

The disposition of a company’s assets is prohibited if it was made at a time when:

• The company was insolvent or, because of the disposition, the company becomes insolvent
• The company enters external administration within 12 months of the disposition
• The company ceased to trade within 12 months of the disposition.

The new legislation prescribes that:

• It is a criminal offence for directors of a company, or its advisers, to make a creditor-defeating disposition. Directors or company advisers found responsible for illegal phoenixing activity may be subject to criminal charges, civil penalties of up to A$200,000, and compensation orders made against them personally.
• Liquidators and creditors of a company can recover compensation from anyone found to have made a creditor-defeating disposition.
• In addition to being liable for outstanding GST debts, directors will be responsible for ensuring that the companies they run have satisfied their tax reporting obligations and paid any outstanding amounts before being entitled to a tax refund.
• Directors are prevented from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors.

Directors and their advisers can use a safe harbour defence where a disposition of property has occurred, but must meet strict criteria to use this defence.

When is setting up a new company not illegal phoenixing?

The Australian government first established the Phoenix Taskforce in 2014 to combat illegal phoenix activity. It is made up of 32 state and federal government agencies including the Australian Taxation Office (ATO), ASIC and Fair Work Ombudsman.

The Taskforce has been responsible for several convictions, including former Kleenmaid Group director Andrew Young who in early February 2020 was sentenced to nine years in prison for fraud and insolvent trading. It also caught former pre-insolvency adviser John Narramore who was convicted of money laundering offences and given a 4.5-year sentence in late 2019.

But it should be noted that it’s not always a crime to set up a phoenix company. Where a director has responsibly managed a company that subsequently fails, he or she can operate the same business using another company without engaging in illegal phoenix activity.

“It should be noted that it’s not always a crime to set up a phoenix company.”

A company may legally restructure by transferring assets to a new company where the old company receives true market value for the assets transferred. However, directors must be transparent and very careful to ensure that this does not unfairly disadvantage creditors of the old company.

Michelle Viscardi is manager, restructuring and insolvency at William Buck in Sydney.