Combating Illegal Phoenix Activity

On 26 October 2017 Dye & Co Pty Ltd lodged a submission with Treasury in relation to the proposed reforms to combat illegal phoenix activity draft legislation. On 5 September 2018 N Giasoumi attended a treasury roundtable discussion on the proposed reforms. We had previously lodged in September 2017 an initial submission with Treasury in response to their request for feedback on Combating Illegal Phoenixing.

The major initiatives proposed by Treasury are:

• The introduction of a new offence to recover voidable creditor defeating dispositions together with enhanced powers for ASIC to prosecute. Further creditors have the ability to take their own action to recover. Such transactions relate to the disposition of assets for less than market value within 12 months of liquidation.
• Pre- insolvency advisers and other facilitators of illegal phoenix activities will also be liable for creditor defeating transfers of assets.
• The extension of the Director Penalty Regime to Goods and Services Tax, Luxury Car Tax and Wine Equalisation Tax liabilities.
• Provisions that limit the backdating of the resignation of company directors.
• Limit the voting power of debts assigned, to the value paid to acquire the debt.

Whilst we agree with the proposed changes we are of the view that:

• The Corporations Act 2001 currently has adequate provisions relating to breaches of directors’ duties (Section 180-Section 184, Section 590 and Section 1307) which if enforced, enables liquidators to combat illegal phoenix type transactions.
• Liquidators are often unfunded and accordingly do not have the financial capacity to litigate in many instances.

We believe the solution is to be proactive and prevent the debt to the ATO (which is often the major creditor left behind) from going unchecked and spiralling out of control. In this regard we suggest:

• Introduce grouping provisions, similar to the State Revenue Office, to enable recovery of outstanding taxes from related entities.
• The ATO should actively monitor and enforcing lodgement of Business Activity Statements. e.g. Cancel an entity’s A.B.N. if it fails to lodge an initial BAS, or three consecutive BAS’s.
• Educate directors in relation to their obligations and penalties if they transgress or obtain unscrupulous advice should be mandatory. It is envisaged that with extra awareness, directors will be more reluctant to listen to the advice of inappropriate pre-insolvency advisors.

An example of the grouping provisions is detailed below:

Entities are often structured to include an entity which employ people (a labour hire company) to perform work on behalf of a related entity (a trading company).

 If the labour hire company is wound up and the liquidator has insufficient funds to pursue a claim against the trading entity for an unjust enrichment claim, then the unpaid taxes are not recovered.

Grouping provision would enable the ATO, to recover unpaid taxes from the trading entity, or the newly engaged labour hire company.

A copy of our submission can be accessed here.