A Bill to combat illegal phoenixing has been introduced into parliament.
‘Phoenixing’ is the frowned upon, but surprisingly common practice of carrying on the same business successively through a series of companies to defeat the interests of creditors of the business. Here is an example of how it is done:
- Bob’s Plumbing is a business trading through the vehicle of a company, Bob’s Plumbing Holdings Pty Ltd. Bob Smith is the sole director of Bob’s Plumbing Holdings Pty Ltd.
- Bob’s Plumbing racks up debts with suppliers which it can no longer afford to pay.
- Bob Smith, the sole director of Bob’s Plumbing Holdings Pty Ltd, with the assistance of his accountant, establishes BPH Pty Ltd and starts trading Bob’s Plumbing through the new company. Bob resigns as a director of the old company.
- Bob causes a transfer of the lease of the shed the business operates from, as well as the plumbing vans and equipment, the trademarks, the domain name and an upcoming contract, into the new company without the new company paying fair value for those things.
- When the suppliers chase Bob for their money, he tells them they need to chase Bob’s Plumbing Holdings Pty Ltd which he is not involved with anymore.
Bob has caused a number of what are referred to as “creditor-defeating dispositions”. His accountant advised him to do it. Have a think about what this means for Bob and his accountant as you read the explanation of the new laws below.
The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 does the following (if passed):
- Phoenixing offences – It will be a criminal offence for officers of a company to engage in conduct that results in a company making a prohibited creditor-defeating disposition. It will also be a criminal offence to procure, induce, incite or encourage someone to do the above. This seems to be directed to advisers, as well as influential people in a business who are not directors.
- Backdating director resignations of leaving the company ‘headless’ – directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors.
- GST liabilities – the Tax Commissioner will be empowered to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances.
- Retention of Tax refunds – the Tax Commissioner will be empowered 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.
The penalty may be up to 5,000 penalty units; 3 times the benefit obtained by the wrongful act; and 10 years’ imprisonment.
We are urging clients with distressed businesses not to engage in any of this activity, lest they end up personally exposed, not only to civil action, but imprisonment.
The laws will come into effect on the first quarter after royal assent is given, which we believe is only a matter of time.