This month at Business Breakfast Club, Lachlan Abbott and Fergus McFarlane of Ernst & Young provided the liquidator’s perspective on legal and illegal phoenix activity. Owing to growing concerns around phoenix activity there has been an increase in regulatory attempts to deter and disrupt illegal phoenix activity.
What is Phoenix Activity?
Phoenix activity involves registering a new company to take over the failed or insolvent business of a predecessor company. This is legitimate where there is genuine company failure and liquidation. Directors may responsibly manage a company, but the company may be unable to pay its debts. If the directors then hand the insolvent company over to a liquidator and register a new company after liquidation to continue the previous business, this will constitute legal phoenix activity.
What is Illegal Phoenix Activity?
Illegal phoenix activity occurs when company directors deliberately try to avoid paying the company’s debts. Directors transfer the company’s assets (often for little or no value) to a new company to continue business operations before handing the company over to a registered liquidator. In this way, the company is intentionally liquidated to avoid paying taxes, creditors and employee entitlements.
Regulatory Approaches for Reform
In the 2018-19 Budget, the Government announced several reforms to corporations and tax laws to deter and disrupt illegal phoenix activity. The draft legislation includes reforms to:
- make it an offence for directors to engage in transfers of company assets that prevent, hinder or significantly delay creditors’ access to those assets;
- make it an offence for pre-insolvency advisers and other facilitators of illegal phoenix activity to incite, induce or encourage a company to make these creditor-defeating transfers of company assets;
- prevent directors from backdating their resignations to avoid personal liability;
- prevent sole directors resigning and leaving a company with no director;
- extend the director penalty provisions to make directors personally liable for their company’s GST and related liabilities;
- expand the ATO’s powers to retain refunds where there are outstanding tax lodgements;
- introduce a Director Identification Number (DIN) to allow enforcement agencies to verify and track the current and historical relationships between directors and the entities they are associated with; and
- restrict the voting rights of related creditors of the phoenix operator at meetings regarding the appointment or removal and replacement of an external administrator.