New restrictions on director resignations and personal liability for GST introduced

Like a phoenix from the ashes, the Treasury Laws Amendment (Combating Illegal Phoenixing Bill) 2019 (Cth) (Bill) rose and was finally passed through both Houses of Parliament last week over a year after it was first introduced and is now awaiting Royal Assent.

The legislation is designed to target and address illegal phoenix activities, which typically involve companies at risk of insolvency disposing of their assets to a new corporation for the purposes of allowing the continuation of their business while avoiding the repayment of debts owing to the old company’s creditors (including employees, service providers and the Australian Taxation Office). The practice is estimated to have cost between $2.85 billion to $5.13 billion in 2015-2016 alone. The reforms have been several years in the making, with a number of the changes first proposed in 2018.

The legislation will amend the Corporations Act 2001 (Cth) (and other statutes) to:

Phoenixing offences

• introduce new offences to prohibit and make voidable creditor-defeating dispositions of company assets, together with new criminal offences and civil penalty provisions for company officers who engage in such activities. A new presumption has been introduced whereby the disposition of an asset may be deemed (for the purpose of recovery proceedings) to have been creditor-defeating if the company failed to keep appropriate records of that disposal. It should be noted that the existing safe harbour provisions have been extended to apply to such dispositions in the context of a restructure
• new powers to enable the Australian Securities and Investments Commission (ASIC) to make orders to recover certain assets for the benefit of creditors (and for liquidators to seek such orders). The court is empowered to set aside such orders where such application is made by the affected party, and the court determines it was not a voidable disposition

Director accountability

• improve director accountability with changes that prevent directors from improperly backdating resignations or resigning if to do so would leave the company without a director. If a company or director fails to notify ASIC of a director’s resignation within 28 days of it occurring, then the resignation will now be deemed to occur on the day ASIC receives notice. This prevents directors from backdating their resignation to avoid liability or culpability for acts or omissions occurring within that period. ASIC and the court have discretion to determine a director’s resignation date where there is sufficient explanation for the delay in notification, or it is otherwise just and equitable to do so

Tax refunds and GST liability

• provide for the retention of tax refunds and personal liability of directors for GST in certain circumstances. This may introduce a new concern and due diligence issue for incoming directors concerned about historical tax liabilities.

No notable amendments were made to the Bill by the Senate, other than to require a review of the changes be conducted five years after the Bill receives Royal Assent. The bulk of the amendments to the Corporations Act 2001 (Cth) will commence immediately after receiving Assent (with a 12 month delay on the director resignation provisions) while the changes to the relevant tax laws will come into effect from the first quarter following Assent.

Authors: Georgia Milne & Clare Giugni

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The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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