Many of you have heard of illegal phoenixing but are not sure of what exactly it encompasses. While there is no legislative definition of illegal phoenixing or phoenixing activity, at its core, it is the use of serial deliberate insolvency as a business model to avoid paying company debts. In a report in 2018, it is estimated that potential illegal phoenixing has an annual direct cost to businesses, employees and governments of between $2.85bn and $5.13bn.
It is no wonder then the government has been on the war path to stamp out the practice. Specific measures targeting illegal phoenixing has recently been passed including: new criminal offences and civil penalty provisions for company officers that fail to prevent the company from making “creditor-defeating dispositions” and other persons (including pre-insolvency advisers, accountants, lawyers, other business advisers etc) that facilitate a company making a “creditor-defeating disposition”. Liquidators and ASIC can seek to recover the assets for the company’s creditors, and in some cases, creditors can recover compensation from a company’s officers and other persons responsible for making a “creditor-defeating disposition”, preventing abandonment of companies by a resigning director or directors, leaving the company without a natural person’s oversight.
Practically, under the new laws, a director cannot resign or be removed by a resolution of company members if doing so would leave the company without a director (unless the company is being wound up). if the resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation is deemed to take effect from the day it is reported to ASIC. However, a company or director may apply to ASIC or the Court to give effect to the resignation notwithstanding the delay in reporting the change to ASIC.
The Commissioner of Taxation can now collect estimates of anticipated GST liabilities (including LCT and WET liabilities). The Commissioner can also recover director penalties from company directors to collect outstanding GST liabilities (including LCT and WET) and estimates of those liabilities. The Commissioner of Taxation can also to retain a refund to a taxpayer that has other outstanding lodgements or information that needs to be provided. Legitimate businesses need not fret, safe habour provisions for genuine business restructures and transactions made with creditor or court approval under a deed of company arrangement are still available.