Introductory Info
Date introduced: 4 July 2019
House: House of Representatives
Portfolio: Treasury
Commencement: Sections 1–3 on Royal Assent; Schedules 1 and 2 on the day after Royal Assent; Schedules 3 and 4 on the first 1 January, 1 April, 1 July or
1 October after Royal Assent
History of
the Bill
The Treasury Laws Amendment (Combating Illegal Phoenixing)
Bill 2019 (the original Bill) was introduced into the House of Representatives
on 13 February 2019. However, it lapsed when the 45th Parliament was prorogued
on 11 April 2019.[1]
The Treasury
Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (the Bill) was
introduced into the House of Representatives on 4 July 2019. The Bill is in
near equivalent terms to the original Bill with necessary changes to
commencement dates and omission of contingent amendments due to the passage of
other legislation.
Purpose of the Bill
The purpose of the Bill is to amend various statutes to:
- introduce
new phoenixing offences
- prohibit
directors from improperly backdating resignations or ceasing to be director
when this could leave a company with no director and
- allow
the Commissioner of Taxation (the Commissioner) to collect estimates of
anticipated goods and services tax (GST) liabilities and make company directors
personally liable for their company's GST liabilities in certain circumstances.
Structure of the Bill
The Bill comprises four Schedules:
- Schedule
1 contains amendments to the Corporations Act
2001 to create phoenixing offences and other rules about property
transfers to defeat creditors. It also contains consequential amendments to:
- Schedule
2 amends the Corporations Act to improve the accountability of resigning
directors
- Schedule
3 amends the A
New Tax System (Goods and Services Tax) Act 1999 (GST Act) and
the Taxation
Administration Act 1953 (TAA) in relation to GST estimates and
director penalties and
- Schedule
4 amends the TAA to provide for the Commissioner of Taxation to retain
tax refunds.
Background
Insolvency
Phoenixing takes place in the context of insolvency which
is explained in broad terms below.
A company is classified as being
solvent if, and only if, it is able to pay all of its debts as, and when, they
become due and payable. Otherwise the company is insolvent.[2]
Directors’ duties and liabilities
The decision about whether a corporation is insolvent is
one which is made by its directors. Directors have a number of duties which are
relevant to this decision. Importantly they must exercise their powers and
discharge their duties with the degree of care and diligence that a reasonable
person would exercise if they were a director of a corporation in the
corporation’s circumstances and had the same responsibilities within the
corporation as the director.[3]
A director of a corporation who makes a ‘business judgment’ is taken to meet
the duty of care and diligence in respect of the judgment if they:
- make
the judgment in good faith for a proper purpose
- do
not have a material personal interest in the subject matter of the judgment
- inform
themselves about the subject matter of the judgment to the extent they
reasonably believe to be appropriate and
- rationally
believe that the judgment is in the best interests of the corporation.[4]
Under section 588G of the Corporations Act a
company director may be liable under the insolvent trading provisions if:
- they
are a director of a company at the time when the company incurs a debt
- the
company is insolvent at that time, or becomes insolvent by incurring that debt
and
- at
that time, there are reasonable grounds for suspecting that the company is
insolvent, or would become insolvent.
Importantly the duty to prevent insolvent trading is a
duty not to incur debts when a company is insolvent.
Appointment
of a liquidator
Once a liquidator is appointed, enforcement by creditors,
other than secured creditors, is stayed.[5]
The liquidator takes control of the company’s property, carries on its business
so far as is necessary for its beneficial winding up, and pays creditors in
accordance with specified statutory priorities. The Personal Property
Securities Act 2009 (the PPSA) sets out the rules for the order
in which secured creditors are paid in the event of insolvency or bankruptcy.
The liquidation of a company generally terminates the
employment of employees.[6]
Employees are considered to be a special type of unsecured creditors. As such,
they have the right, if
there are funds left over after payment of the fees and
expenses of the liquidator, to be paid their outstanding entitlements in
priority to other unsecured creditors. Priority employee entitlements are
grouped into classes and paid in the following order:
- outstanding
wages, superannuation
contributions and superannuation guarantee charge (SGC)[7]
- outstanding leave of absence (including annual leave and sick
leave, where applicable, and long service leave)[8]
and
-
retrenchment pay[9]
(sometimes referred to as redundancy pay).
Each class is paid in full before the next class is paid.
If there are insufficient funds to pay a class in full, the available funds are
paid on a pro rata basis (and the next class or classes will be paid nothing).
About Phoenixing
In July 2012, the Fair Work Ombudsman (FWO) released a
report prepared by PriceWaterhouseCoopers (PwC) on phoenix activity in
Australia.[10]
The PwC report defines phoenix activity as:
... the deliberate and systematic liquidation of a corporate
trading entity which occurs with the fraudulent or illegal intention to:
- avoid tax and other liabilities, such as employee entitlements
- continue the operation and profit taking of the business through
another trading entity.[11]
According to the Treasury:
In its most basic form fraudulent phoenix activity involves
one corporate entity carrying on a business, accumulating debts without any
intention of repaying those debts (for the purpose of wealth creation or to
boost the cash flow of the business) and liquidating to avoid repayment of the
debt. The business then continues in another corporate entity, controlled by the
same person or group of individuals.
Fraudulent phoenix arrangements are, however, often more
sophisticated. In the ATO’s experience, a typical fraudulent phoenix
arrangement would be structured as follows:
- a closely held private group is set up, consisting of several
entities one of which has the role of hiring the labour force for the business
- the labour hire entity will usually have a single director who is
not the ultimate ‘controller’ of the group
-
the labour hire entity has few, if any, assets and little share
capital
- the labour hire entity fails to meet its liabilities and is
placed into administration or liquidation by the ATO
- a new labour hire entity is set up and the labour moved across to
work under this new entity and
- the process is repeated, with little disruption to the day-to-day
operation of the overall business and the financial benefits from the unpaid
liabilities are shared amongst the wider group.[12]
Fraudulent phoenix activity
involves the liquidation of a company in order to avoid debts with the full
intention of continuing the business after the liquidation. Fraudulent phoenix
activity also usually involves the intentional structuring of a company in a
way that allows directors to avoid meeting their obligations to pay taxes,
employee entitlements and debts owed to other businesses.[13]
It is important to note that phoenix activity may be legal
as well as illegal.
Legal phoenix activity covers situations where the previous
controllers start another similar business, using a new company when their
earlier company fails, in order to rescue its business. Illegal phoenix
activity involves similar activities but the intention is to exploit the
corporate form to the detriment of unsecured creditors, including employees and
tax authorities.[14]
Examples
of circumstances where phoenixing is legal are:
- a
viable business is prematurely liquidated by an overly cautious controller who
fears insolvent trading liability during a period of poor
liquidity—nevertheless the fundamental business is sound or
- a
business fails due to factors beyond its control (such as a tourist operator
whose first company is forced into liquidation or voluntary administration by
an airline strike).
About the
phoenix taskforce
In response to concerns about the growing problem of
phoenixing—particularly in the building and construction industry—the Phoenix
Taskforce was formed in 2015. The Taskforce comprises 34 federal, state and territory government
agencies, including the Australian Taxation Office (ATO), ASIC, the Department
of Jobs and Small Business, and the FWO. The Phoenix Taskforce provides a
whole-of-government approach to combatting illegal phoenix activity.[15]
Since its inception the Phoenix Taskforce has achieved the following results:
- along with ASIC, prosecuted 25 illegal phoenix operators
- ASIC took action against 12 registered liquidators and 79 company
directors
- a reduction in newly-created entities linked to confirmed phoenix
activity
- identified businesses potentially at risk of illegal phoenix activity
and
- the Serious Financial Crime Taskforce is taking action in relation to seven
criminal phoenix matters.[16]
Cost of phoenixing to the Australian economy
The July 2018 report entitled The
Economic Impacts of Potential illegal Phoenix Activity estimates the
annual costs of phoenix activity are:
- the
cost to business from unpaid trade creditors is between $1,162 million to
$3,171 million
- the
cost to employees, lost through unpaid entitlements is between $31 million
to $298 million and
- the
cost to government from unpaid taxes and compliance costs is around
$1,660 million.
The report puts the annual total cost of illegal phoenix
activity at between $2.85 billion and $5.13 billion.[17]
Consultation
In September 2017, the Turnbull Government announced its
intention to introduce a comprehensive package of reforms both to deter and to penalise
phoenix activity.[18]
The package would include:
... the introduction of a Director Identification Number (DIN)
and a range of other measures to both deter and penalise phoenix activity.
The DIN will identify directors with a unique number, but it
will be much more than just a number. The DIN will interface with other
government agencies and databases to allow regulators to map the relationships
between individuals and entities and individuals and other people.
In addition to the DIN, the Government will consult on
implementing a range of other measures to deter and disrupt the core behaviours
of phoenix operators, including non-directors such as facilitators and
advisers.[19]
Accordingly, Treasury circulated an exposure draft of the
Bill for public comment.[20]
37 submissions were subsequently received.[21]
A comparison of the exposure draft and the final form of the Bill reveals
significant changes to clarify the amendments.
Committee consideration
Senate Economics Committee
The original Bill was referred to the Senate Standing
Committees on Economics (Senate Economics Committee) for inquiry and report by
26 March 2019.[22]
The Senate Economics Committee recommended that the Bill be passed stating:
The committee understands that illegal phoenix activity is
becoming increasingly sophisticated and difficult to detect and prosecute under
existing legal frameworks. The committee believes the package of reforms
contained in the Bill will give regulators additional enforcement and
regulatory tools to better detect and disrupt illegal phoenix activity and to
prosecute or penalise directors and others who engage in or facilitate this
illegal activity. Though the committee cautions that the regulators' ability to
pursue and prosecute effectively is closely linked to the right amount of
resourcing being made available to the regulator to effectively perform its
work.
... the
committee is concerned that, as drafted, the scope of a 'creditor defeating
disposition' and the circumstances under which such transactions are voidable
may not capture the entire range of dispositions that are not legitimate
commercial transactions. Consequently, this may have an unintended consequence
of limiting the ability of regulators and liquidators to fully combat some
illegal phoenixing activities.[23]
Senate Standing Committee for
the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills
(the Scrutiny of Bills Committee) considered the Bill and noted that it
introduces new strict liability offences. However the Explanatory Memorandum to
the Bill does not explain why the application of strict liability is necessary
or appropriate in the circumstances.[24]
Accordingly, the Scrutiny of Bills Committee asked the Assistant Treasurer for
a ‘more detailed justification for the application of strict liability to an
offence attracting a penalty of 120 penalty units’.[25]
Assistant Minister for Superannuation, Financial Services
and Financial Technology, Senator Hume responded to the Scrutiny of Bills
Committee on 8 August 2019. Her comments are canvassed under the heading ‘Key
issues and provisions’ below.[26]
Whilst the Scrutiny of Bills Committee noted her
explanation:
... from a scrutiny perspective, the Committee remains
concerned about the application of strict liability to an offence carrying a
penalty of 120 penalty units. In this regard, the Committee reiterates that the
Guide to Framing Commonwealth Offences states that the application of strict
liability is only considered appropriate where the relevant offence is only
punishable by up to 60 penalty units.[27]
Policy position of non-government parties
The Australian Labor Party (Labor) members of the Senate
Economics Committee, while not opposing the legislation, made additional
comments in relation to the Bill expressing their concerns as follows:
The primary concern is that the Government is focusing on new
legislative amendments and offences when the primary focus should be on
amending and enforcing existing legislation.
The second concern is that this legislation does not seem to
anticipate logical manoeuvrings from unscrupulous actors that could be
reasonably expected if this legislation were to pass.[28]
An example cited by the Labor members of a potential
response to the legislation is where a business is structured so that debts accrue
in an assetless company, and assets are held in another.[29]
Position of
major interest groups
The Senate Economics Committee which inquired into the
original Bill received 21 submissions. Submitters generally supported the
legislation[30]—although
some expressed concern that it did not go far enough.[31]
Others expressed the view that, even though there is merit
in a Bill to deter and disrupt illegal phoenix activity, more proactive policy
and enforcement of existing law is needed.[32]
More detailed comments by the submitters to the Senate
Economics Committee are canvassed below under the heading ‘Key issues and
provisions’.
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed
the Bill’s compatibility with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[33]
Parliamentary
Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights has
determined that the Bill does not raise human rights concerns.[34]
Key issues
and provisions—Schedule 1
Financial
implications
According to the Explanatory Memorandum to the Bill the
measures in Schedule 1 will have nil financial impact on the Commonwealth.[35]
Creditor-defeating
dispositions
Part 5.7B in Chapter 5 of the Corporations Act is
about recovering property or compensation for the benefit of the creditors of
an insolvent company. Items 7–73 of Part 1 of Schedule 1 to the Bill
amend Part 5.7B of the Corporations Act to insert the new phoenixing
offences.
The amendments do not specifically define the term
‘phoenixing’. Rather, item 18 of Part 1 in Schedule 1 to the Bill
inserts proposed section 588FDB into the Corporations Act to
introduce the term creditor-defeating disposition in relation to
company property.
Proposed subsection 588FDB(1)
of the Corporations Act provides that a disposition of company property
is a creditor-defeating disposition if both of the following
conditions are satisfied:
- the
consideration paid to the company for the relevant property was less than
the lesser of:
- the
market value of the property or
- the
best price that was reasonably obtainable for the property, having regard to
the circumstances existing at that time and
- the
disposition has 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 that process.
The test is applied at the time that the relevant
agreement for the disposition was made or, if there was no such
agreement, at the time of the disposition.[37]
Importantly, there is no requirement for intention. The test for whether there
has been a creditor-defeating disposition is an effects test.
Proposed subsections 588FDB(2) and 588FDB(3) of the
Corporations Act respectively extend the concept of disposition
to:
- the
conduct of a company that results in another person becoming the owner of
property that did not previously exist and
- the
conduct of a company which makes a disposition of property to another person who
then gives some or all of the consideration for the disposition to a third
party other than the company—so that the amount of the disposition is equal
to the consideration that was given to the third party.
Key
issue—best price reasonably obtainable
Professor of Corporate Law at the Sydney Law School, Jason
Harris, opines:
The reforms have the potential to stifle good faith
restructuring as companies will often transfer assets from an insolvent company
(Oldco) to a new company (Newco) as part of a debt for equity swap. In such a
case it could be said that the transfer would prevent the property being
available for creditors in Oldco's liquidation. Of course, if market
consideration is paid in the debt for equity swap then this would not be a
creditor-defeating disposition, but the proposed laws would open up new grounds
for fights over valuations and questions over the process followed to obtain
the valuation or at least the “best price that was reasonably obtainable”.[38]
Presumption
of creditor-defeating disposition
Requirements to keep and retain financial records are set
out in subsections 286(1) and (2) of the Corporations Act. The
subsections operate so that a company which fails to comply with these
requirements is presumed to be insolvent.[39]
Item 9 of Schedule 1 to the Bill inserts proposed
subsection 588E(4A) into the Corporations Act to create a presumption
that the consideration paid for a disposition is less than both the market
value of the property and the best price reasonably obtainable for the property
(that is—the first condition of a creditor-defeating disposition is
satisfied), if it is proved that the company failed to keep financial records
relating to the disposition or failed to retain financial records about the
disposition for seven years after it occurred.
The presumption created by proposed subsection 588E(4A)
is subject to an exception. Item 11 of Schedule 1 to the Bill amends
existing subsection 588E(6) of the Corporations Act to negate the
presumption if it would prejudice a right or interest of a person where the
company is presumed insolvent because of a contravention of subsection 286(2).
The exception will operate where it is proved that:
- the
contravention was due solely to someone destroying, concealing or removing
financial records of the company
- none
of those financial records was destroyed, concealed or removed by the
first-mentioned person and
- the
person was not in any way, by act or omission, directly or indirectly,
knowingly or recklessly, concerned in, or party to, destroying, concealing or
removing any of those financial records.
Voidable
transactions
Item 20 of Part 1 in Schedule
1 to the Bill inserts proposed subsection 588FE(6B) which sets out the additional
set of circumstances which must be satisfied for a transaction to be voidable.
First the transaction is a creditor-defeating
disposition of property.[43]
Second, at least one of the following applies:
- the
transaction was entered into when the company was insolvent, during the
12 months ending on the relation‑back day, or both after that day and on
or before the day when the winding up began
- the
company became insolvent because of the transaction or an act done to
give effect to the transaction during the 12 months ending on the relation-back
day, or both after that day and on or before the day when the winding up began
- less
than 12 months after the transaction, the start of an external
administration of the company occurs as a direct or indirect result of the
transaction.[44]
Third, the transaction was not done under a
compromise or arrangement approved by a Court,[45]
under a deed of company arrangement[46]
or by an administrator,[47]
liquidator or a provisional liquidator[48]
of the company.[49]
According to the Explanatory Memorandum to the Bill:
Placing a company into administration shortly after it makes
a voidable transaction is a common illegal phoenix activity. A persistent issue
in the practical operation of the corporate insolvency law is the cost and
uncertainty associated with establishing that a company was insolvent at a
particular time. This cost can make it impractical for liquidators to pursue
many recovery actions, frustrating the intention of the law.
Together with the presumption of insolvency where financial
records are not maintained, this amendment is intended to significantly ease
the burden on liquidators pursuing illegal phoenix activity and recovering
assets for the benefit of company creditors.[50]
Court orders
Current law
Currently section 588FF of the Corporations Act allows
a court to make orders about voidable transactions on the application of a
liquidator. However, the court is prevented from making an order in relation to
a voidable transaction in a range of circumstances including where:
- the
order is prejudicial to the rights of a person who is not a party to the
transaction and who has acquired the property in good faith without notice
of the company’s insolvency: existing subsection 588FG(1) or
- the
order is prejudicial to the rights of a party to the transaction who became
a party to the transaction in good faith and is a purchaser for value,
without notice of company’s insolvency: existing subsection 588FG(2).
The Explanatory Memorandum to the Bill sets out the nature
of the ‘good faith’ test:
A general good faith test applies to subsequent purchasers of
property that was the subject of a creditor-defeating disposition (regardless
of whether the initial company was insolvent at the time). Where an initial
creditor-defeating disposition is voidable, a subsequent purchaser’s title to
property is protected provided the subsequent purchaser acquired the property
in good faith. The subsequent purchaser’s claim to the property will be
voidable if that person acted in bad faith, for example because they knew the
initial transfer was voidable or were wilfully blind to the likelihood that the
initial transfer was voidable.[51]
What the
Bill does
Item 24 of Schedule 1 to the Bill inserts proposed
subsections 588FG(7)–(9) into the Corporations Act. The provisions
will apply to those voidable transactions which are the result of a creditor-defeating
disposition as follows:
- subsections
588FG(1) and (2) do not apply to an order based solely on the transaction being
a creditor-defeating disposition because the disposition caused the company to
enter external administration: proposed subsection 588FG(7)
- the
court may not make an order in relation to a creditor-defeating disposition
where the disposition was based on a course of action which was reasonably
likely to lead to a better outcome for the company—that is, based on the safe
harbour provisions in paragraphs 588GA(1)(a) and (b) (see the discussion about
the safe harbour provisions below): proposed subsection 588FG(8) and
- the
court may not make an order in relation to a creditor-defeating disposition
where the disposition was made to a third party who acquired the property in
good faith: proposed subsection 588FG(9).
ASIC orders
The Bill gives ASIC a suite of new powers. According to
the Explanatory Memorandum to the Bill:
The amendments ensure ASIC has power to take effective action
against illegal phoenix activity and protect the interests of legitimate creditors.
This will:
- overcome difficulties faced by
liquidators where the company has insufficient funds to cover the cost of court
action; and
- allow ASIC to intervene where a
liquidator is not fulfilling its obligations to recover company property, for example
because the liquidator is complicit in the illegal phoenix activity of a
company director.[52]
Pre-conditions
for making an order
Item 25 of Schedule 1 to the Bill inserts proposed
Subdivision D—ASIC orders about certain voidable transactions. Within new Subdivision D of Part
5.7B, proposed section 588FGAA of the Corporations Act applies
only if three pre-conditions are satisfied:
- a
company for which a liquidator has been appointed has made a creditor-defeating
disposition of property
- the
disposition is voidable because of subsection 588FE(6B) and
- a
person has received money or property as a direct or indirect result of the
disposition or the person’s acquisition of the property after the disposition.
In that case a liquidator may request ASIC to make an order—provided
that the request is made during the period beginning on the relation‑back
day and ending on the later of either three years after that day
or 12 months after the first appointment of a liquidator to the company.[53]
Nature of the
orders
ASIC may make orders either in response to a request by a
liquidator (as above) or on its own initiative. These are administrative orders.
They may:
- direct
a person to transfer to the company property that was the subject of the
disposition[54]
- require
a person to pay to the company an amount that, in ASIC’s opinion, fairly
represents some, or all, of the benefits that the person has received (directly
or indirectly) because of the disposition[55]
- require
the person to transfer to the company property that, in ASIC’s opinion,
fairly represents the application of proceeds of property that was the subject
of the disposition.[56]
However, the power for ASIC to make an order is limited so
that ASIC must not make such an order if it has reason to believe that, if it
were a court, section 588FG would prevent it from making a corresponding order
under section 588FF.[57]
(See the information under the heading ‘Court orders’, above).
An order must include written reasons for the making of
the order.[58]
At any time, ASIC may, in writing given to the person, revoke or amend the
order.[59]
In deciding whether to make an order, ASIC must take into account:
- the
conduct of the company and its officers
- the
conduct of the person who received the money or property
- the
circumstances, nature and terms of the disposition
- the
relationship (if any) between the company and the person and
- any
other matter ASIC considers relevant.[60]
A court may, upon application from a person who has been
given an order by ASIC, or any other person interested in such an order, set
aside the order if the court is satisfied that the three pre-conditions for the
making of the order (as set out above) are not met.[61]
Key
issue—breadth of the power
Whilst the Law Council of Australia (LCA) supports the
Government’s proposal to make liquidator recoveries for creditors easier, it
does not support the proposed power for ASIC on the grounds that ‘it raises
multiple rule of law concerns by being too broad and arguably seeks to confer
judicial power of the Commonwealth on ASIC’.[62]
The LCA explains its concerns as follows:
The proposed new section 588FGAA confers a broad discretion
on ASIC as to whether to issue a notice (subsection 588FGAA(5)), and
specifically limits ASIC’s discretion if it believes that the court would not
make an order ...
These are powers that are far beyond the powers conferred on
the Official Receiver under the equivalent Bankruptcy Act provision.
Furthermore, the Court may only overturn the notice if it determines that
section 588FGAA does not apply (subsection 588FGAE(3)). In the Committee’s
view, these elements not only make the proposed new power inappropriate as
being too broad, but render it open to a constitutional challenge for
improperly conferring judicial power on ASIC.[63]
(emphasis added)
Professor Harris also raised concern about the new power:
Directing ASIC to place itself in the position of a court is
objectionable on policy grounds as well as on constitutional grounds.
ASIC should not be assuming the role of the court, nor should it be punishing
persons for receiving property subject to a voidable transaction, particularly
where no court determination has yet been made. The order is made based purely
on "ASIC believing that the disposition is voidable".[64]
(emphasis added)
The Australian Institute of Company Directors (AICD) noted
that ‘the nature of the power is very significant as it enables ASIC to compel
the transfer of property to the company under its own initiative’. Accordingly,
the AICD recommends that ‘ASIC be required to seek a Court order to unwind the
effect of a voidable’ creditor-defeating disposition. [65]
The concerns raised by the LCA and Professor Harris are
that the Bill would confer judicial power of the Commonwealth on ASIC in
violation of section 71 of the Constitution.
Given that phoenixing often involves substantial sums of money, if this is
correct – or even arguable – it may be that the Bill, as drafted, will invite a
constitutional challenge by a person or entity subject to such an order from
ASIC. If this were to occur, such litigation may result in a degree of
uncertainty regarding the operation of the ASIC order regime until such
litigation was resolved.
Offence—failing
to comply with orders
Proposed section 588FGAC of the Corporations Act
provides that it is a criminal offence to engage in conduct which contravenes
an order by ASIC (as set out above). In the absence of any specific fault
element, the automatic fault element is intention. This means that a person who
negligently breaches an ASIC order will not be liable for a criminal offence
under the Bill. Item 101 of Part 3 in Schedule 1 to the Bill sets the maximum
pecuniary penalty for the offence at 60 penalty units for an individual.[71]
Where ASIC makes an order requiring a person to pay to a
company an amount that represents all or part of the benefits that the person
has received as a result of the disposition:
- the
amount payable under the order is recoverable as a debt in a court of competent
jurisdiction[72]
and
- the
order may be complied with by transferring the property to the company.[73]
Where a court convicts a person of
failing to comply with an order, the court may order the person to pay the
company an amount not exceeding the amount involved in the contravention.[74]
This amount is in addition to the pecuniary penalty imposed for the offence.
Duty to
prevent creditor-defeating dispositions
Current
duties
Currently Division 3 of Part 5.7B of the
Corporations Act sets out a director’s duties to prevent insolvent trading.
In particular, section 588G applies where:
- a
person is a director of a company at the time when the company incurs a debt
- the
company is insolvent at that time, or becomes insolvent by incurring that debt
and
- at
that time, there are reasonable grounds for suspecting that the company is
insolvent, or would become insolvent.
In that case, the person commits an offence if:
- when
the company incurred the debt the person is a director of the company
- the
company is insolvent at that time, or became insolvent by incurring the debt
- the
person suspected at that time that the company was insolvent or would become
insolvent as a result of incurring the debt and
- the
person’s failure to prevent the company incurring the debt was dishonest.[75]
A person who fails to prevent the company from incurring
the debt (but not dishonestly) contravenes subsection 588G(2) of the Corporations
Act if:
- the
person is aware at that time that there are such grounds for suspecting that
the company is insolvent, or would become insolvent or
- a
reasonable person in a like position in a company in the company’s
circumstances would be so aware.
This is a civil penalty provision.[76]
The maximum penalty payable by an individual is the greater of:
- 5,000
penalty units ($1,050,000) and
- if
the Court can determine the benefit derived and detriment avoided because of
the contravention—that amount multiplied by three.[77]
The maximum penalty payable by a body corporate is the
greatest of:
- 50,000
penalty units ($10.5 million) or
- if
the Court can determine the benefit derived and detriment avoided because of
the contravention—that amount multiplied by three and
- either:
- 10
per cent of the annual turnover of the body corporate for the 12-month period
ending at the end of the month in which the body corporate contravened, or
began to contravene, the civil penalty provision or
- if
that amount is greater than an amount equal to 2.5 million penalty units—2.5
million penalty units ($525 million).[78]
What the
Bill does
The Bill expands the director’s duties to include a duty
to prevent creditor‑defeating
dispositions. To that end, proposed
Subdivision B—Duties to prevent creditor-defeating dispositions is inserted
into Division 3 of Part 5.7B of the Corporations Act by
item 33 of Part 1 in Schedule 1 to the Bill.
The duty is directed towards an officer of a
corporation.
Criminal offence of an officer
Within new Subdivision B, proposed
subsection 588GAB(1) prohibits an officer of a company
from engaging in conduct that results in the company making a creditor‑defeating
disposition of property of the company, if:
- the
company is insolvent
- the
company becomes insolvent because of the disposition or a number of
dispositions made at the time of the disposition or
- the
company enters external administration, or ceases to carry on business
altogether, less than 12 months after the disposition as a direct or indirect
result of the disposition.
Criminal
offence of a person
Illegal phoenix activity may occur as a result of advice
from a solicitor, barrister, accountant, insolvency practitioner or business
advisory/turnaround specialist. Where an old company is placed in liquidation,
the liquidator takes on the same duties as a director of the
company and this operates as a disincentive for any improper conduct.[80]
However, problems arise where lawyers and accountants who formulate, advocate
and even carry out a fraudulent phoenix scheme are likely to escape being
characterised as an officer of the corporation.[81]
The Bill inserts proposed subsection 588GAC(1) into
the Corporations Act to address this issue. It prohibits a person
from engaging in the conduct of procuring, inciting, inducing or encouraging
the making by a company of a disposition of property in equivalent
circumstances to proposed subsection 588GAB(1), where the disposition is
a creditor-defeating disposition. This ensures that such persons
providing advice that facilitates illegal phoenixing are captured.
A failure to comply with either of those provisions is a
criminal offence. Item 102 of Part 3 in Schedule 1 to the Bill sets the
maximum penalty for the offences at 10 years imprisonment.
Civil penalties
Proposed subsections 588GAB(2) and 588GAC(2)
of the Corporations Act establish civil penalty provisions in equivalent
terms to the criminal offence if, in addition, the officer or the person (as
the case may be) knows, or a reasonable person in that position would know,
that the disposition is a creditor-defeating disposition. [82]
Exceptions to the application of the offences and civil
penalty provisions may apply.[83]
Expanding the safe harbour
As stated above, section 588GA of the Corporations Act
sets out the safe harbour provisions.[84]
The rationale for these provisions is:
The threat of Australia’s insolvent trading laws, combined
with uncertainty over the precise moment a company becomes insolvent have long
been criticised as driving directors to seek voluntary administration even in
circumstances where the company may be viable in the longer term. Concerns over
inadvertent breaches of insolvent trading laws are frequently cited as a reason
that early stage (angel) investors and professional directors are reluctant to
become involved in a start-up.
The [provisions] create a safe harbour for company directors
from personal liability for insolvent trading if the company is undertaking a
restructure outside formal insolvency. This will drive cultural change amongst
company directors by encouraging them to keep control of their company, engage
early with possible insolvency and take reasonable risks to facilitate the
company’s recovery instead of simply placing the company prematurely into
voluntary administration or liquidation.[85]
Items 34–41 of Part 1 in Schedule 1 to the Bill amend
section 588GA of the Corporations Act to extend the operation of the
safe harbour so it applies to dispositions of property as well as to a company
incurring a debt, where the company is undertaking a restructure that is
reasonably likely to lead to a ‘better outcome’ for the company than entering a
formal insolvency process.
Extending
the defences
Existing
defences
Currently section 588H of the Corporations Act provides
three defences for a person who fails to prevent a company from incurring a
debt and thereby contravenes subsection 588G(2).
The first defence arises if it is proved that at
the time when the debt was incurred, the person had reasonable grounds to
expect, and did expect, that the company was solvent and would remain solvent
even if it incurred the debt.[86]
The second defence arises for the director of a
company where, because of illness or for some other good reason, he or she did
not take part in the management of the company at the time the relevant debt
was incurred.[87]
The third defence arises where the person took all
reasonable steps to prevent the company from incurring the debt.[88]
The matters to be taken into account in deciding whether the person took
reasonable steps include any action the person took with a view to appointing
an administrator of the company; when that action was taken; and the results of
that action.[89]
What the
Bill does
Item 45 of Part 1 in Schedule 1 to the Bill repeals
and replaces subsection 588H(1) of the Corporations Act so that the
defences not only apply to civil penalty proceedings for a contravention of subsection
588G(2) but also to civil penalty proceedings under proposed subsections
588GAB(2) and 588GAC(2).
To facilitate the expanded application of the defences proposed
subsection 588H(1) introduces the concept of the key time.
For the purposes of the amendments in this Bill, the key time is
the time of the disposition of a company’s property.
Items 46–49 and items 51–54 amend section
588H to apply each of the defences to a disposition of property. The only
exception is set out in item 50 of Part 1 in Schedule 1 to the Bill which
inserts proposed subsection 588H(3A) into the Corporations Act. It
operates so that the reasonable grounds defence (the first defence
mentioned above) will not be available in relation to a disposition of the
company’s property if the key time was less than 12 months before either:
- the
start of an external administration that was brought about by the disposition
or
- the
company ceased to carry on business as a result of the disposition.
Liability to
compensate the company
Current
rules
Subsection 588J(1) of the Corporations Act provides
that where, on an application for a civil penalty order against a person in relation
to a contravention of subsection 588G(2)—that is a breach of the directors’ duty
to prevent incurring a debt leading to insolvency—the Court is satisfied that:
- the
person committed the contravention in relation to the incurring of a debt by a
company
- the
debt is wholly or partly unsecured and
- the
person to whom the debt is owed has suffered loss or damage in relation to the
debt because of the company’s insolvency
then the Court may order the first-mentioned person to pay
to the company compensation equal to the amount of that loss or damage.
What the
Bill does
Items 55–57 of Part 1 in Schedule 1 to the Bill
amend section 588J of the Corporations Act so that the liability to
compensate the company is expanded to include circumstances where there have
been proven contraventions of proposed subsections 588GAB(2) and
588GAC(2) relating to a disposition of property of a company.
Items 58 and 59 of Part 1 in Schedule 1 to
the Bill amend section 588K of the Corporations Act so that compensation
may be awarded in the same proceedings that determined the offence or civil
penalty. This means that a person may also be ordered to pay compensation when
found guilty of an offence under proposed subsections 588GAB(1) or 588GAC(1).
Compensation may also be sought against a person who has
contravened proposed sections 588GAB or 588GAC but has not been
convicted or been subject to a civil penalty order.[90]
In that case a creditor may sue to recover the compensation with the written
consent of the company’s liquidator.[91]
Items 97–99 in Part 3 of Schedule 1 to the Bill
ensure that creditors cannot obtain compensation to the extent that compensation
is obtained under the provisions of the Corporations Act in Part 5.8A
that deal with employee entitlements.
Key issues
and provisions—Schedule 2
Financial
implications
According to the Explanatory Memorandum, the measure in
Schedule 2 to the Bill will have nil financial impact on the Commonwealth. [92]
Resignation
of directors
Part 2D.3 of the Corporations Act deals with the
appointment, remuneration and cessation of appointment of directors. Within
Part 2D.3, section 203A states that a director of a company may resign as a
director by giving a written notice of resignation to the company at its
registered office.
Item 2 in Schedule 2 to the Bill inserts proposed
sections 203AA and 203AB into the Corporations Act.
Proposed section 203AA of the Corporations Act
sets out the day that the resignation of a director takes effect. The general
rule, in proposed subsection 203AA(1) is that a person’s resignation as
a director of a company takes effect:
- on
the day the person stopped being a director—provided that ASIC is notified in
the prescribed manner and form within 28 days after the day the person stopped
being a director
- otherwise—on
the day that written notice of the resignation is lodged with ASIC.
There is an exception to this general rule. The person may
apply to either ASIC or the Court for it to fix the resignation day.
In either case, the person must satisfy either ASIC or the Court that he, or
she, stopped being a director of the company on the resignation day.[93]
The Explanatory Memorandum to the Bill provides the
rationale for these changes:
Company directors engaging in illegal phoenix activity have
opportunities to exploit deficiencies in these laws to obscure their role in
company decisions and to shift accountability to other directors. In egregious
cases, a phoenix operator may seek to shift accountability to a ‘straw
director’ who has no real involvement in the company, may have little or no
knowledge of their appointment and is often of limited financial means,
frustrating recovery and enforcement efforts. ‘Straw directors’ may also be
deceased persons or entirely fictitious.[94]
However the Governance Institute of Australia expressed
concern that the amendments might ‘give rise to unintended consequences’
providing the example of the sale of a company with a settlement date of 30
June:
After settlement, control of the company transfers to the new
owners. The outgoing company secretary or solicitor would be responsible for
undertaking certain administrative tasks arising from the transfer, including
notification of resignation of the outgoing directors, effective as at 30 June.
If for some unforeseen circumstance (such as human error,
illness etc), the notification of resignation is lodged more than 28 days after
the effective date, (say on 1 August) under the current law, the late lodgement
will attract a late fee and the effective date of the outgoing director’s
resignation will then be recorded in the ASIC register as 30 June, which
reflects the reality of the transaction.
Under the new provisions, the late lodgement will result in
the effective date of the outgoing directors’ resignations being recorded as 1
August. This does not accurately reflect the reality of the transaction or who
controls the company at the record date and will result in the outgoing directors
being liable for the acts of the company’s new directors until their effective
resignation date.[95]
However, it would appear that such circumstances would
potentially be captured by the exception provided by proposed subsection
203AA(2), as that allows ASIC or the Court to fix the resignation date when
the relevant notification date is otherwise missed. This is discussed below.
Application
to ASIC
Where the person makes an application to ASIC:
- the
application must be lodged, in the prescribed form, with ASIC within 56 days of
the day the person stopped being a director of the company[96]
- ASIC
must not fix the resignation day unless it has considered any conduct, act,
omission or representation of the applicant relevant to notifying ASIC of the
resignation and the reasons for any delay.[97]
Application
to the Court
Where the person makes an application to the Court:
- the
application must be lodged with the Court within 12 months after the day the
person stopped being a director or such later time as the Court allows[98]
- the
Court must not fix the resignation day as the day the person’s resignation
takes effect unless it is satisfied that it is just and equitable to do so[99]
- if
the Court fixes the resignation day as the day the person’s resignation takes
effect, the applicant must, within two business days, lodge with ASIC a copy of
the order made by the Court that fixes the day. A failure to do so gives rise
to an offence of strict liability.[100]
The maximum penalty for the offence is 120 penalty units.[101]
Scrutiny of
Bills Committee comments
As stated above, the Scrutiny of Bills Committee
questioned the penalty for the offence. The response from the Assistant
Minister for Superannuation, Financial Services and Financial Technology,
Senator Hume, states:
Proposed section 203AA ensures directors are held accountable
for misconduct by preventing company directors from improperly backdating
resignations. If the resignation of a director is reported to ASIC more than 28
days after the purported resignation, the resignation takes effect from the day
it is reported to ASIC. However, a company or a director may apply to ASIC, or
the Court, to give effect to the resignation notwithstanding the delay in
reporting the change to ASIC. If the Court makes an order to backdate the effective
date of a director's resignation, proposed subsection 203AA(6) provides that
the applicant must provide a copy of the order to ASIC within two business
days.
The obligation to inform ASIC of a Court order is necessary
to ensure the company register maintained by ASIC is accurate. A failure by an
applicant to inform ASIC of an order fixing a director's date of resignation
would cause the company register to be inaccurate and the register could not
then be relied on by consumers and other members of the community dealing with
the relevant company or director.
An offence of strict liability is necessary to ensure
compliance with this simple but important obligation ... While the amendments
depart from the Guide [to Framing Commonwealth Offences], the fine imposed is
justified by the important nature of the obligation, the significant
consequences on the community of non-compliance and the need for a strong and
appropriate deterrent.[102]
Abandoning
the company
Proposed section 203AB of the Corporations Act
operates so that the resignation of a director has no effect if it would leave
the company without at least one director. Importantly though this will not
prevent the resignation of a director from taking effect on or after the day
that the winding up of the company has begun.
Similarly, a resolution by members of a proprietary
company is void if the resolution would have the effect that the company does
not have at least one director. However, the resolution will not be void
provided that it is to take effect in or after the day that the winding up of
the company has begun.[103]
Stakeholder
comments
The AICD acknowledged the challenges ‘relating to
abandonment of companies by directors engaged in illegal phoenix activity’.[104]
However, it expressed concern:
... this change could perversely incentivise directors of
troubled companies to resign early to ensure that they do not become the sole
director on the board, and therefore be precluded from resigning. This could
drain a company of directors at a time when they are most needed to guide the
company through difficult circumstances ...
the AICD considers the best option to address the issue of
abandonment is stronger enforcement action against directors who abandon
companies through use of existing laws, and particularly the directors’ duties
provisions of the Corporations Act.[105]
According to the submission by Professor Helen Anderson of
the Melbourne School of Law:
The two issues here are volume and enforcement. Our research
indicated that there were about 37,600 companies deregistered by ASIC each year
for failure to return forms and pay fees. This is nearly five times the amount
of companies liquidated. The point of the government’s suggestion is that by
deeming the resignation to be ineffective, the director remains accountable as
a director. However, this does nothing to ensuring that the affairs of those
abandoned, deregistered companies are investigated ... or that action will be
brought against those directors.[106]
Key issues
and provisions—Schedule 3
Financial
implications
According to the Explanatory Memorandum, as at the 2018–19
Budget the measure is estimated to make the following saving to budget over the
forward estimates:
- financial
year 2018–19: nil
- financial
year 2019–20: $5 million
- financial
year 2020–21: $15 million
- financial
year 2021–22: $20 million.[107]
Commissioner
to estimate liabilities
As noted previously, fraudulent phoenix activity often involves
the intentional structuring of a company in a way that allows directors to
avoid meeting their obligations to pay taxes, employee entitlements and debts
owed to other businesses.[108]
The amendments in Schedule 3 of the Bill are aimed at such conduct with respect
to GST liabilities.
Current law
Currently, Division 268
in Schedule 1 of the TAA empowers the Commissioner to make estimates of an entity’s
liability in relation to pay as you go (PAYG) withholding under Part 2-5
of the TAA or any unpaid SGC and to recover the amount of the estimate.
Section 268-15 of the TAA requires the Commissioner
to give a written notice of the estimate which:
- identifies
the underlying liability
- specifies
the date of the estimate
- sets
out the amount of the estimate
- states
that the amount of the estimate is due and payable and
- explains
how the amount of the estimate may be reduced or the estimate revoked.
Once a notice of estimate has been given by the
Commissioner to a taxpayer, the amount is due and payable.[109]
The amount of the estimate is distinct from the underlying liability of the
taxpayer to pay the estimated amount.[110]
This ensures that the accuracy of the estimate is irrelevant to the legal
liability to pay.[111]
Director
penalty notice regime
The director penalty notice (DPN) regime reinforces the obligations
of companies to pay their estimated or actual tax liabilities. It does this by
providing that directors have an obligation to ensure that the company complies
with its obligation to pay its tax liability.[112]
The obligation imposed on the directors continues until the company:
- has
paid the outstanding tax or
- is
wound up or placed in voluntary administration.[113]
Where this does not occur, the ATO may issue a director
penalty notice if the directors do not pay the relevant liabilities by the due
date.[114]
There are two defences available. First, a
company’s director will have a defence to a director penalty notice if they are
able to establish that, due to illness or for ‘some other good reason’ it would
have been unreasonable to expect the director to take part in managing the
company, and they did not take part in managing the company when they were
appointed to that role.[115]
Second it will be a defence if a company director:
- took
all reasonable steps to ensure that the directors caused the company to comply
with its obligation; or the directors caused an administrator of the company to
be appointed under the Corporations Act; or the directors caused the
company to begin to be wound up or
- there
were no reasonable steps that the company director could have taken to ensure
that any of those things happened.[116]
What the
Bill does
Under the GST Act a ‘net amount’ is defined broadly
to be an entity’s total GST payable less any input credit entitlements, subject
to any adjustments.[117]
Where an entity has failed to lodge a return, the Commissioner may make an
assessment of net amount based on the information available to him or her –
that is, an estimate.[118]
Items 3 and 6 of Schedule 3 to the Bill
amend section 268-1 and subsection 268-10(1) respectively to expand the matters
about which the Commissioner may make estimates to include net amounts
in respect of GST, wine equalisation tax and luxury car tax and to recover
those amounts.
Item 7 of Schedule 3 to the Bill inserts proposed
subsection 268-10(1B) into the TAA. It provides that where a person
has a net amount [119]
for a tax period:[120]
- the
person is treated as being liable to pay that net amount
- that
liability is treated as having arisen on the day by which the person must give their
GST return for the tax period to the Commissioner
- that
liability is treated as being payable on that day and
- the
entire amount of that liability is treated as being unpaid.
The effect of the Bill is to extend the Commissioner's
reach to include estimates of an entity’s net amount under the A New Tax System
(Goods and Services Tax) Act 1999 (GST Act). When an entity
has failed to lodge a GST return on its due date, the Commissioner can issue a
notice of an entity’s estimated net amount to the taxpayer. The taxpayer
will then be deemed to owe this estimated net amount of GST to the
Commissioner, despite an actual assessment not having been made.
Stakeholder
comments
The Housing Industry Association (HIA) opposes Schedule 3
of the Bill on the grounds that the rule ‘can have a harsh application’ as the
time allowed within which to arrive at an agreement with the Commissioner,
appoint an administrator, or commence the winding up of the company is very
short.[121]
According to Professor Helen Anderson:
In terms of including GST in the [director penalty notice]
DPN regime, it is important to recognise the fundamental difficulty with using
DPNs to recover any losses caused by illegal phoenix activity. The whole modus
operandi of illegal phoenix activity is to liquidate a company and transfer the
business to a new one. There is no liability on a director under a DPN where
there is a prompt liquidation within 21 days of receiving the notice, provided
liabilities are reported.
A savvy, deliberate phoenix operator therefore does not fear
a DPN, regardless of what it includes. The cost of incorporating a new company
– currently $463 – is worth incurring to avoid tens of thousands in tax debts.[122]
Directors duties
Current law
An entity has an obligation to pay an estimate or other
tax liability set out in a notice by the Commissioner. In addition, section 269‑1
in Schedule 1 of the TAA provides that the directors of a company
have a duty to ensure that the company meets its obligations including, but not
limited to, those under Division 268 (as set out above) and under Part 3 of the
Superannuation
Guarantee (Administration) Act 1992 (SGAA) (obligation to pay SGC).
If it is unable to meet those obligations, the directors must ensure that the
company promptly goes into voluntary administration under the Corporations
Act or into liquidation.
Where the company does not meet its obligation the DPN
regime in the TAA operates so that a person who is a director of a
company on or after the initial day must cause the company to
comply with its obligation.[124]
Where the obligation still exists on the due day the directors
are subject to a penalty.[125]
The penalty is issued by the Commissioner providing a
notice under the DPN regime. However the Commissioner must not commence
proceedings to recover any such penalty from a director until the end of 21
days after the Commissioner has given a written notice under the DPN regime to
that effect.[126]
What the
Bill does—creating director penalty
Items 13 and 14 of Schedule 3 to the Bill amend
sections 269-1 and 269-5 of Schedule 1 of the TAA to broaden the
obligations which the directors of a company have a duty to meet to include an
entity’s unsatisfied liabilities to pay assessed net amounts and
GST instalments under the GST Act.
The obligation on the directors begins on the initial day.[127]
Item 16 inserts proposed paragraph
269-10(5)(ba) into the TAA so that the initial day for
assessed or estimated net amounts is the day the relevant tax period ends.
The penalty arises on the due day. Item
15 amends the existing table in subsection 269-10(1) of the TAA to
provide the due day is:
- for
assessed net amounts—the day the company is required to pay the assessed net amounts
- for
GST instalments— the day the company is required to pay the GST instalments.
What the
Bill does—remission of director penalty
If the director complies with the obligation (to pay
assessed or estimated net amounts or GST instalments) before the director
penalty notice is issued or within 21 days of the day the notice was issued,
the penalty may be remitted.[128]
Alternatively, if the director complies with their
obligation by placing the company into administration or by commencing the wind
up of the company within three months of the due date the full amount of the
penalty is remitted.[129]
After the three months has elapsed the penalty is said to be ‘locked down’ and
the director is under an obligation to pay the penalty amount.
Where the company enters administration or begins to be
wound up after the lockdown date, only the amount of the company’s assessed net
amount liability that was calculated by reference to information reported to
the Commissioner before that date is remitted. Item 17 of Schedule
3 to the Bill inserts proposed table items 5 and 6 into the table
in subsection 269-30(2) of the TAA to reflect this.
Key issues and provisions—Schedule 4
Financial
implications
According to the Explanatory Memorandum to the Bill, ‘as
at the 2018–19 Budget, the measure is estimated [to] result in a small but
unquantifiable gain to revenue over the forward estimates period’. [130]
Current law
Part IIB of the TAA provides for the treatment of
money that is paid to the Commissioner, or is held by, or is owing to the
Commissioner, in relation to taxpayers’ tax affairs. The provisions allow the
Commissioner to apply money received against a taxpayer’s tax debts and require
the Commissioner to pay refunds in certain circumstances.
The obligation to pay refunds is subject to the
Commissioner’s discretion to retain refunds in certain circumstances, including
for example:
- where
the taxpayer has failed to provide certain information such as a Business
Activity Statement (BAS) or a Petroleum Resource Rent Tax (PRRT) notice[131]
or
- where
the Commissioner is verifying information provided by the taxpayer.[132]
The Commissioner may retain the refund until the
taxpayer provides the relevant notification to the Commissioner, or the
Commissioner makes or amends an assessment of the amount.[133]
However, the Commissioner must pay interest on the amount under the Taxation (Interest
on Overpayments and Early Payments) Act 1983 if the refund is further
delayed.
What the Bill
does
Item 1 in Schedule 4 to the Bill inserts proposed
subparagraph 8AAZLG(1)(b)(iii) into the TAA to expand the circumstances
under which the Commissioner may retain a tax refund to include where the
entity has not given the Commissioner a notification required under any
provision of a taxation law, which may affect the amount the Commissioner
refunds to the entity.
The Explanatory Memorandum to the Bill sets out the
rationale for the amendment:
Taxpayers engaged in illegal phoenix activity will often not
lodge or will delay lodging returns that will result in a tax liability
becoming due. However, these taxpayers may lodge a return (often a BAS) where
it will result in a credit arising. Operators may use the delay in the tax
liability arising to obtain a refund they would otherwise not be entitled to,
strip assets from the company or otherwise frustrate the collection of the
liability.[134]
Stakeholder
comments
Although the CFMEU was broadly supportive of the
amendments in the Bill, it expressed some concern about the proposal to expand
the ATO’s existing power to retain tax refunds:
The proposal ... must not have the unintended consequence of:
a. reducing the total pool of funds available to creditors
(which would have a negative effect on workers affected); or
b. locking up outstanding entitlements for creditors
(including affected workers).
The proposal
should not interrupt the priority set up pursuant to s.556 of the Corporations
Act 2001, or otherwise privilege the ATO as a creditor (in relation to all its
liabilities) over other creditors, including employees, so as to subvert the
current order of priority. [135]
Concluding
comments
According to a Treasury proposals paper circulated in
November 2009 entitled Action Against Fraudulent Phoenix Activity:
Defining precisely what constitutes fraudulent phoenix
activity is inherently difficult ... However, underlying the distinction between
illegitimate, or fraudulent, phoenix activity and a legitimate use of the
corporate form, is the intention for which the activity is undertaken.
Relevantly, ASIC draws a distinction between businesses that get into a
position of doubtful solvency or actual insolvency as a result of poor business
practices ... and those operators who deliberately structure their operations in
order to engage in phoenix activity to avoid meeting obligations.[136]
(emphasis added)
The Melbourne Law School report entitled Quantifying
Phoenix Activity: Incidence, Cost, Enforcement contains a detailed study of
publicly available statistics in an effort to determine the cost of phoenix
activity.[137]
The report includes the results of a search of ASIC media releases for the
period 1 January 2004 to 30 June 2014. That search identified that 51 directors
were disqualified in circumstances involving problematic or illegal phoenix
activity. There were 165 companies involved in these 51 disqualifications.
Within those media releases, nine provided the details of the loss suffered.[138]
These are set out in table 1 below.
Table 1: Cases where the loss was caused by problematic or illegal phoenixing
| Case no. |
Amount of loss
per group |
No. of
companies in
the group |
No. of
directors
disqualified |
Average loss
per company |
| 1 |
$23 mill |
6 |
4 |
$3.38 mill |
| 2 |
$13 mill |
6 |
1 |
$2.17 mill |
| 3 |
˃$5 mill |
4 |
1 |
$1.25 mill |
| 4 |
$4.96 mill |
6 |
2 |
$1.67 mill |
| 5 |
$4.7 mill |
3 |
1 |
$1.57 mill |
| 6 |
$4.02 mill |
5 |
1 |
$0.80 mill |
| 7 |
$1.66 mill |
4 |
1 |
$0. 41mill |
| 8 |
$0.87 mill |
2 |
1 |
$0.43 mill |
| 9 |
$0.53 mill |
3 |
1 |
$0.18 mill |
| Total |
˃$57.74 mill |
33 |
13 |
˃$1.75 mill per
company |
Source: H Anderson, A O’Connell, I Ramsay, M Welsh and H
Withers, Quantifying
phoenix activity: incidence, cost, enforcement, Melbourne Law School
and Monash Business School, October 2015, pp. 45–46.
Clearly the problems which the
Bill seeks to address are costly to the community and have been evident for
some time.[139]
The Bill contains four measures to combat illegal
phoenixing activity—without actually defining phoenixing per se. These are:
- the
introduction of new phoenixing offences
- a
prohibition on company directors from improperly backdating resignations or
ceasing to be a director when this will lead to the abandonment of the company
- allowing
the Commissioner to estimate GST liabilities and making company directors
personally liable for their company's GST liabilities in certain circumstances
and
- expanding
the circumstances in which the ATO may retain a tax refund.
Each of these is expected to confront instances of
corporate conduct which may be relevant to phoenixing.