Like the Phoenix that can rise from the ashes, this term is also used to describe the activity when a new company is created from the ashes of another company that was in debt and had been deliberately liquidated, only to continue the business of the old company while avoiding having to pay its debts.

New laws are now in place to target illegal Phoenixing of companies, which recent estimates indicate directly costs Australian businesses, employees and governments between $2.85 billion and $5.13 billion each year.

While there is no Australian legislative definition of “illegal phoenixing” or “phoenixing activity”, it is understood that through the use of deliberate insolvency a business or company attempts to avoid paying company debts.

To combat this, the new laws brought in by the ATO target a range of behaviours, including preventing property transfers to defeat creditors, improving accountability of resigning directors, allowing the ATO to collect estimates of anticipated GST liabilities and authorising the ATO to retain tax refunds.

Property transfer to defeat creditors

This law introduces new criminal offences and civil penalty provisions that will apply to company officers who fail to prevent the company from making “creditor-defeating dispositions”, and to other persons (including pre-insolvency advisers, accountants, lawyers and other business advisers) who facilitate a company making a “creditor-defeating disposition”.

Liquidators and the Australian Securities and Investments Commission (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”.

A “creditor-defeating disposition” is defined as disposing of company property for less than its market value (or less than the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up. To ensure legitimate businesses aren’t affected by this wide definition, safe harbour has been maintained for genuine business restructures and transactions made with creditor or court approval under a deed of company arrangement.

Accountability of resigning directors

In order to reduce the instances of unscrupulous directors and business owners from using loopholes to shift the blame, the new laws seek to prevent 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.

In addition, 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.

Collection of anticipated GST liabilities

These new laws now allow the ATO to collect estimates of anticipated GST liabilities, including luxury car tax (LCT) and wine equalisation tax (WET) liabilities. The ATO can also recover director penalties from company directors to collect outstanding GST liabilities (including LCT and WET) and estimates of those liabilities.

Retaining refunds

The new laws also allow the ATO to retain a refund to a taxpayer where that taxpayer has other outstanding lodgements or needs to provide important information.

Source: Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth).