Entries by Matthew Pease

Decoding the Illegal Phoenix: Part 2

Decoding the Illegal Phoenix: Part 2

The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 seeks to provide a balance between eradicating illegal phoenix activity and providing a framework to facilitate a genuine restructure of a distressed company.



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Monday, 27 July 2020

By Matthew Pease

In the previous article, I outlined the definition of phoenix activity. In this post, I will discuss the four key measures that were part of the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019.

Schedule 1
This measure introduced new phoenix offences to prohibit the creditor-defeating dispositions of company assets prior to a liquidation. This can include property sold for less than market value, at a time when the company was insolvent or became insolvent as a result of the transaction or even if the transaction results in the company entering administration within twelve months (no insolvency required). The measure allows liquidators and ASIC to recover such property. It is also designed to penalise those who engage in or facilitate any such disposition including company directors or even pre-appointment advisors through the introduction of new civil and criminal liability provisions.

Schedule 2
This measure ensures that directors are held accountable for misconduct which includes backdating resignations as office holders or ceasing to act as director when this will leave a company with no directors. Commencing on 18 February 2021, a director’s resignation will take effect on the desired date as long as the form is lodged with ASIC within 28 days of that date. Otherwise, the date will be the day the form is lodged. ASIC or a court may agree to backdate a resignation, however an application will need to be made within 56 days of the resignation date and if sufficient evidence can be provided to confirm the resignation actually occurred on the earlier date.

Schedule 3
This measure has enabled changes to the taxation system and the Director Penalty Notice (DPN) regime. Of note is that a DPN can now include outstanding Goods and Services Tax, Wine Equalisation Tax and Luxury Car Tax. Only debts incurred from 1 April 2020 can be included. Directors should be made aware of the differences between a lockdown and non-lockdown DPN. For further information on this, please refer to the ATO website or give our office a call for additional guidance.

Schedule 4
This measure simply enables the ATO to retain any taxation refunds where a taxpayer has failed to lodge a return or provided information to the ATO as required. This will ensure that a taxpayer has satisfied their obligations and paid any outstanding statutory debts prior to being entitled to that refund. This measure commenced on 1 April 2020 and applies to refunds payable after that date.

These changes attempt to find that balance between eradicating illegal phoenix activity but allowing a genuine restructure of a distressed company. There is still some way to go on this matter with the exploration of director identification numbers and calls to adopt some form of the UK method in pre pack administrations. These changes will have an impact on directors and company advisors who will need to be aware of their continued obligations when dealing with company assets prior to an insolvency appointment.

They will need to comply with these obligations or face the potential for harsh civil and criminal penalties. With the right advice, a genuine restructure is possible and one that will not fall foul of an investigating liquidator and the new powers under this Bill.


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Decoding the Illegal Phoenix: Part 1

Decoding the Illegal Phoenix: Part 1

According to a 2018 report prepared by PwC, the direct costs to the Australian economy resulting from illegal phoenix activities are estimated to be between $2.85bn - $5.13bn per year



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Friday, 17 July 2020

By Matthew Pease

What is the definition of phoenix activity?

Unfortunately, there is no one agreed upon definition of phoenix activity.

  • The ATO defines it as when a new company is created to continue the business of the old company that has been deliberately liquidated to avoid paying its debts.
  • ASIC defines it as when company directors transfer the assets of the old company to a new company without paying market value and leaving the debts with the old company which is then placed into liquidation. When a liquidator is then appointed, there are no assets remaining to recover and creditors cannot be paid. 

Illegal phoenix activity has far reaching economic impact to business in unpaid trade creditors, to employees for unpaid entitlements and to government in unpaid taxes.

A 2018 report prepared by PwC for the Phoenix Taskforce estimated the direct costs to the Australian economy resulting from illegal phoenix activities to be between $2.85 – $5.13 billion per year.

Not all phoenix activity is illegal according to the Phoenix Research Team who have categorised phoenix activity into five categories:

  1. Legal phoenix: also known as ‘business rescue’, where directors have no intention to defraud creditors, and saving the business (but not the company) is the best course of action for all stakeholders.
  2. Problematic phoenix: technically legal, where there is no evidence of directors intending to defraud creditors, but the net effect of the phoenixing is not beneficial to creditors. This may involve an ill equipped director who has had past business failures.
  3. Illegal type 1: where an improper intention to transfer assets and defraud creditors is formed at or immediately before the time of business failure.
  4. Illegal type 2: phoenix as a business model, where the company is set up to deliberately engage in personally profitable phoenix activity (i.e. the business was never operated so as to succeed).
  5. Complex illegal: in addition to illegal type 2, this model also coincides with more serious crimes such as creating false invoices (e.g. GST fraud), false identities, fictitious transactions, money laundering, visa breaches, and misusing migrant labour.

With these different categories, the question then becomes which phoenix activity is illegal and what is being done to combat this practice?

The Government is attempting to eradicate phoenix activity and the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was passed by both houses of Parliament on 5 February 2020. This Bill implements four key measures to combat illegal phoenix activity:

  1. introducing new phoenix offences;
  2. ensuring that directors are held accountable for misconduct
  3. introducing changes to the Director Penalty Notice regime; and
  4. authorising the ATO to retain tax refunds where a taxpayer has failed to lodge a return.

These measures will be discussed in further detail in a later post.


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