On 16 August 2018, Treasury released draft legislation to give effect to a range of measures to both deter and disrupt illegal phoenixing and more harshly punish those who engage in  and facilitate this illegal activity. The Government announced these measures in the 2018 Federal Budget.

There is both legal and illegal ‘phoenix’ activity, and it is good to see that the legislators have not lost sight of that. This is evident from the draft Explanatory Memorandum to the Draft Bill, which says the following.

1.2   Phoenix activity is not defined in legislation and can encompass both legitimate business rescue activities and the use of serial deliberate insolvency as a business model to avoid paying company debts.

1.3   While the scale of illegal phoenix activity ranges from the opportunistic to the systemic, a common characteristic is the stripping and transfer of assets from a company to another entity. Such transactions are carried out by a company’s directors or other controlling minds with the intention of defeating the interests of the first company’s creditors in that company’s assets. Such transactions are also facilitated by others,including unscrupulous pre-insolvency advisers, accountants, lawyers or other business advisers, who advise companies on how to engage in illegal phoenix activity.

 

Reforms in the exposure draft legislation, include:

  • SCHEDULE 1 – will introduce new phoenix offences and related powers, that target those who conduct and those who facilitate illegal phoenix transactions.
    • The measures will centre around a new concept of ‘creditor-defeating dispositions’ to be defined in a new s588FDB to be inserted into the Corporations Act 2001 [Sch 1, item 11] They will be transactions that have the ‘effect’ of ‘preventing property becoming available for the benefit of the company’s creditors, in the winding up of the company’ or of ‘hindering, or significantly delaying the process of making the property’ available (as set out above).
    • Amongst other duties to prevent insolvent trading (in Part 5.7B, Division 3 of the Corps Act), new duties will be inserted, on company ‘officers’, to prevent ‘creditor-defeating dispositions’, if the company is insolvent, becomes insolvent, as a result of the creditor-defeating disposition, or enters insolvent administration, within 12 months of the disposition, as a direct or indirect result of the disposition. This will be in a new s588GAA [item 26] and breach of these duties will be a criminal offence.
    • Pre-insolvency advisers and other persons must not ‘procure, incite, induce or encourage’ a company to make ‘creditor-defeating dispositions’ that are similarly linked to the company’s insolvency. This will be in a new s588GAB [item 26] and breach of these duties will be an offence, also.
    • These will be both criminal and civil offences, attaching very high maximum penalties, including up to 10 years jail, 4,500 penalty units (45,000 penalty units for companies;  3 times the value of benefits obtained by the third parties; and, for companies, 10% of its turnover, for the 12 months ending in the month of the offence – via new Item 138A in Sch 3 to the Corps Act. [Sch 1, item 68 of the Draft Bill]
    • The offences will be supported by an extension of the existing liquidator asset clawback avenues. A new s588FE(6B) will make ‘creditor-defeating dispositions’ voidable [item 13]. New ss588FG(7)-(10) will be inserted, relating to orders a Court can make about such transactions [item 17].
    • ASIC will also receive a new regulatory tool to recover property lost as a result of ‘creditor-defeating dispositions’. This will be by inserting new s888FGAA – s588FGAE. [item 18]
  • SCHEDULE 2 – will help hold directors more accountable for their role in a company affairs. FIRST, directors will be prevented from backdating their resignations (to avoid personal liability). If ASIC has not received advice of a resignation, within 28 days of (purportedly?) having ceased to be a director, then the date the resignation takes effect will be the date that ASIC does receive the form notifying it of the resignation (with appeal mechanisms, if it’s just and equitable, after taking into account their conduct). This will be in new s203AA of the Corps Act [inserted by Sch 2 of the Amending Bill, item 2]. SECOND, the resignation of a director will not be effective, if there is no remaining or substituted director – under proposed s203AB [item 2].
  • SCHEDULE 3 – will make it easier for the the Commissioner to collect GST. FIRST, new provisions in Sch 1 to the Taxation Administration Act 1953 (TAA) will extend the Div 268, so that the Commissioner can also recover ‘estimates’ of GST (to be paid by the taxpayer company) [items 1 – 11 of Sch 3]. SECOND, the ‘Directors Penalty Notice’ (DPN) provisions in Div 269, will be extended to make directors personally liable for their company’s actual or estimated GST [items 12 – 19]. The same ‘lock down’ form of liability, for GST, will apply as for PAYGw and SGC, namely where the return is more than 3 months late – under s269-30(2) of the TAA1 [item 16]. A ‘lock down’ liability is one where it is too late, to avoid liability, when receiving the notice of director’s liability, by putting the company into insolvent administration.
  • SCHEDULE 4 – will expand the Australian Taxation Office’s existing power to retain refunds from Running Balance Accounts (RBAs) under s8AAZLG of the TAA. It will doe this by extending the reason for withholding being the Commissioner not yet having information required under any other provision of the ‘taxation law’ – new sub para 8AAZLG(1)(b)(iii) [Sch 4, item 1]. This ties in with the Inspector General’s recommendation that the Government legislate an extension of the ATO’s power to retain refunds, as a result of it investigating possible fraud in the ‘precious metals’ industry.
  • AMENDMENTS to the Insolvency Practice Rules (Corporations) 2016 will restrict the voting rights, of creditors, in insolvency meetings, to the amount they paid, for an assignment of a debt, they could otherwise vote, in a poll of creditors. This will apply to the ‘appointment or removal of the external administrator of a company’. This will be by inserting the proposed s75-95(1A) and s75-110(7) into the above Rules .

The Draft EM claims that these measures are tightly targeted at those who misuse the corporate form, while minimising any unintended impacts on legitimate businesses and restructuring. I am not so sure that this is borne out by the detail in the proposed drafts.

The proposed reforms follow extensive public consultation, undertaken in 2017, and have been informed by the work of the Government’s Phoenix Taskforce.

SUBMISSIONS are due by 27 September 2018.

FJM 31.8.18

[Treasury website: Consultation Page, Draft Bill, Draft EM (Bill), Draft Insolvency Practice (Voting) Rules, Draft Explanatory Statement (Rules); LTN 157, 16/8/18; Tax Month – September 2018]

 

Comprehension questions (answers available)

  1. Is ‘Illegal Phoenix activity’ serial deliberate insolvency as a business model to avoid paying company debts, including employee entitlements, PAYG withheld from wages, employee super or SGC tax and GST (only to arise from the ashes – like a phoenix – as a similar entity, to do it all again)?
  2. Is all ‘phoenix activity’ illegal?
  3. Does Treasury say these measures are aimed at ‘illegal phoenix activity’?
  4. Will directors be liable to criminal and civil penalties for breach of a duty to avoid their company making a ‘creditor-defeating disposal’ of any (or all) of its property?
  5. Will a director be prevented from avoiding personal liability, by deferring the effective date of their resignation, until the date ASIC receives a notice of the resignation (if that notice is more than 28 days after the reported resignation date)?
  6. Will a director be allowed to resign, if there is no other/remaining director?
  7. Will the Commissioner be able to collect GST (in addition to PAYGw and SGC) as an estimate from the taxpayer and collect either the GST or an Estimate of GST from directors under extensions of the ‘Estimates’ provisions in Div 268 of the TAA and extensions of the DPN provisions (in Div 269 of the TAA)?
  8. Will the Commissioner get added power to retain RBA refund amounts, whilst he investigate their validity?
  9. Will an assignee of a debt be able to vote the value of that debt, in a poll to appoint or remove an external administrator of a company?

[Answers:1.yes;2no(itCanBeAnInnocentAndBonaFide’Rescue’OfBusinessInAnInsolventCompany);

3.yes;4.yes;5.yes;6.no(ThatIsOneOfTheReforms);7.yes;

8.yes(ifNowHeHasNotReceivedAnyInformationRequiredByTheTaxationLawThatMayBeRelevant);

9.no(onlyTheAmountTheyPaidForTheAssignment)]

 

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