Anti-Phoenixing Laws and Director Penalty Notices
Important Updates for Directors
Company directors should note new laws increasing their exposure to personal liability for certain debts and creating new criminal offences and civil penalties under the Corporations Act 2001 (Cth).
As the title suggests, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020, targets phoenix activities that rob the Australian economy and place companies engaging in illegal conduct at an unfair advantage. We summarise below some key provisions and their impact on company directors.
Director Penalty Notices (DPNs) may now be issued for unpaid / unreported GST
Company officers would be aware that the Australian Taxation Office (ATO) can issue a DPN for unremitted Pay As You Go (PAYG) deductions and Superannuation Guarantee Charges (SGCs) for which directors may become personally liable.
If the DPN issues as a result of an unpaid liability reported within 3 months of the due date, the director must either pay the debt, appoint an administrator or cause the company to be wound up within 21 days. If the DPN issues as a result of an unreported liability or a liability reported after 3 months of the due date, the director is unable to avoid personal liability by having the company wound up.
The DPN regime now also applies to Goods and Services Tax (GST), Wine Equalisation Tax (WET) and Luxury Car Tax (LCT), with potential to make directors personally liable for unpaid amounts in certain circumstances.
After lodgement of an activity statement, the ATO may issue a 21-day GST DPN if the liability remains unpaid within 3 months of the due date. Directors must either pay the GST liability or place the company in administration or liquidation.
If a director causes a company to fail to lodge an activity statement within 3 months after the due date, the ATO can issue a Lockdown GST DPN. In such cases, the ATO may estimate the net amount of GST due and personal liability by a director cannot be avoided by placing the company in administration.
Additionally, the Commission of Taxation may withhold tax refunds to satisfy prospective tax obligations if a taxpayer fails to lodge a return or provide certain information pertaining to an estimated refund.
Spotlight on phoenix activities
Phoenixing may take various forms but essentially involves activities orchestrated by company officers aimed at avoiding liability for company debt. In such cases, assets may be transferred for below-market value or no consideration from an original company to a newly created entity. The original company is then wound up, leaving behind unpaid taxes, creditors and employees, while the new company begins its new life, trading under a different name, but usually under the same management.
Additional powers to combat creditor-defeating dispositions
The reforms enable the Australian Securities and Investments Commission (ASIC), either on its own initiative or upon application of a liquidator, to order the recovery of creditor-defeating dispositions of property.
A creditor-defeating disposition is one having the effect of 'preventing the property from becoming available for the benefit of the company's creditors in the winding up of the company, or hindering or significantly delaying the process of making the property available for the benefit of the company's creditors in the winding up of the company.'
Dispositions of property that may be considered 'creditor-defeating' include property for which the consideration was less than market value, or the best price reasonably obtainable in the circumstances.
To facilitate a recovery order, the disposition must have been made while the company was insolvent, or 12 months before the company entered administration or liquidation, or have caused the company's insolvency.
New criminal offences and civil penalty provisions
Additional provisions under the Corporations Act 2001 introduce criminal offences and civil penalties for company officers that fail to prevent a company from making creditor-defeating dispositions, as well as ‘other persons’ that facilitate the making of a creditor-defeating disposition.
The inclusion of ‘other persons’ who must not procure, incite, induce or encourage the company to make such a disposition has potential to expose professionals such as lawyers, accountants and insolvency advisors to liability.
Defences may be available for an alleged contravention of the new offences, such as legitimate restructuring activities or transactions under a deed of company arrangement or scheme of arrangement.
The safe harbour provisions presently in place for offences under insolvent trading provisions will also apply.
Restrictions on resignations - improving the accountability of directors
The laws restrict company officers from improperly backdating resignations and preclude a single (last) director of a company from resigning or being removed by a resolution of members, unless the company is being wound up.
The restrictions aim to minimise misconduct by preventing resignations aimed to obscure a director's involvement in company decisions or to shift accountability to other directors, in particular, 'paper' directors that have no real involvement in the management of the company.
Resignations reported to ASIC more than 28 days after the 'purported resignation' will now take effect on the day of lodgement unless the company or a director applies to ASIC or the Court to fix the purported date of resignation.
The applicant must establish that the director stopped being a director on the purported resignation date and it must be just and equitable to give effect to that date, taking into account any conduct, act or omission of the applicant with respect to notifying ASIC of the resignation and the reasons for the delay.
Directors should comply with their GST and other reporting requirements to minimise the risk of personal liability for unpaid amounts. Business Activity Statements should be lodged within the required timeframes and professional advice sought by directors if a company is facing insolvency or other issues likely to expose them to liability.
Directors in receipt of a DPN should seek urgent advice on their options to avoid personal liability or to lodge a defence.