New laws set to combat illegal phoenixing of companies

Proposed new laws could see company directors who deliberately liquidate a company only to start another to avoid obligations to creditors jailed for up to 10 years.

The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth) (the Bill) was introduced to Parliament on 14 February 2019 to address and detect illegal phoenixing activity.

Illegal phoenixing” is creating a new company and transferring assets to that company from a company that has been deliberately liquidated for no proper reason. This is often done by directors for the purpose of defeating the interests of the company’s creditors, who include suppliers, contractors and employees.

In July 2018, the Australian Taxation Office (ATO)_released a report, entitled “The Economic Impacts of Potential Illegal Phoenix Activity” which stated the total direct cost of illegal phoenix activity is between $2.85 to $5.13 billion, with the following parties bearing the brunt of the problem as evidenced in the table below:

Affected Party Cost What remains unpaid?
Businesses $1,162 – $3,171 million Unpaid trade creditors
Employees $31 – $298 million Unpaid entitlements
Government $1,660 million Unpaid taxes and compliance costs

The Bill allows regulators to prosecute and/or penalise directors and others involved in facilitating the illegal transfer and illegitimate liquidation.

The Bill will:

  1. introduce new phoenixing offences to:
    1. prohibit creditor-defeating transfers of company property;
    2. penalise those who engage in or facilitate such transfers; and
    3. allow liquidators and the Australian Securities and Investments Commission (ASIC) to recover the property transferred;
  2. ensure directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director if it leaves the company with no directors;
  3. allow the Commissioner of Taxation to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances ; and
  4. authorise the Commissioner of Taxation to retain tax refunds where a taxpayer has failed to lodge a return or provide other information to the Commissioner that may affect the amount the Commissioner refunds.

Criminal Offences, Civil Penalties and Compensation

Under the new laws, it will be a criminal offence for:

  1. officers to engage in conduct that results in a company making a prohibited CDD under section 588GAB of the Act. To be held criminally responsible, the officer must be reckless as a result of their conduct; and
  2. a person to procure, incite, induce or encourage a company to make a prohibited CDD under section 588GAC. To be held criminally responsible, the person must be reckless as a result of their conduct.

The penalty for a contravention of the above is:

  1. if an individual:
    1. 10 years imprisonment;
    2. a fine, the amount of which is to be the greater of $945,000 or 3 times the benefit obtained (and detriment avoided) by that individual; or
    3. both of the penalties listed above;
  2. if a company, a fine, the amount of which is to be the greater of:
    1. $9,450,000;
    2. 3 times the benefit obtained (and detriment avoided) by one or more persons reasonably attributable to the prohibited CDD; or
    3. 10% of the annual turnover the company.

Failure to comply with an ASIC administrative order is also an offence punishable with the same penalties.

Civil penalties also apply to:

  1. officers that engage in conduct that results in a company making a disposition where a reasonable person would have known the disposition was a CDD under section 588GAB of the Act; and
  2. a person that procures, incites, induces or encourages a company to make a prohibited CDD under section 588GAC.

In addition, liquidators can recover damages from offending officers and facilitators of the CDD criminal offence or civil penalty provisions suffered by the company’s creditors as a result of the CDD and the company’s insolvency.

This Article was written by Eloise Preller, Associate – Commercial and Charlotte Olsen, Lawyer – Commercial.