New legislation reinforces need for directors to get the right advice

New legislation reinforces need for directors to get the right advice

Whilst the tidal wave of regulation, governance and accountability continues to grow, the Federal Government has announced the introduction of new laws to combat illegal phoenixing and to focus on the accountability of directors and their advisers.

What is illegal phoenixing?

Illegal phoenixing is an activity which is undertaken when a business is liquidated to avoid paying debts (including taxes, employee wages, superannuation and creditors/suppliers) and a new company is created to continue the business, often using a similar name.

Though most directors would not knowingly participate in illegal phoenixing, moving assets to protect a director’s personal financial wealth when a business is facing liquidation could be viewed as phoenixing and both the director and their adviser may now be held liable.

What will change?

The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 makes it an offence for company directors to engage in creditor-defeating dispositions of company assets or to hinder or delay access to company property.

  • Both a director and their adviser (pre-insolvency or other architects of illegal phoenix activities) may be held accountable.
  • The government has amended the Insolvency Practice Rules to restrict voting rights of related creditors and ensure honest creditors are not being affected by those complicit in illegal phoenix activity.
  • Directors may be held accountable for misconduct by preventing directors from improperly backdating registrations or ceasing to be a director when this would leave the company with no directors. This will be implemented through a new act called the Commonwealth Registers Act 2019 which has been introduced to modernise the commonwealth registers and will include a “director identification number (DIN)”.
  • The Commissioner will be able to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances. This is on top of the current provisions that can create a personal liability for wages withholding tax and compulsory employee super contributions.
  • The Commissioner of Taxation will be able to retain tax refunds where a tax payer has failed to lodge a return or provide other information to the Commissioner that may affect the amount the Commissioner refunds.
  • The safeguards include an extension to the safe harbour provisions for directors of companies in financial distress. These amendments allow the safe harbour provisions to “continue to operate as intended and continue to promote a culture of business restructure and turnaround”.

How does this affect honest businesses?

This legislation highlights the necessity to choose the right advisers when a business is suffering from financial distress. Your day-to-day accountant or business adviser may not have the skills or expertise to ensure that you do not fall foul of the legislation. If there are signs of distress, you and/or your adviser should consider engaging the services of a specialist business recovery and insolvency expert to navigate through the legislation, protect your assets and give the business the best chance of survival

What do advisers need to know?

Advisers are now accountable alongside their clients and face fines and prosecution should they be found to have given the wrong advice. They need to be viewed by the Commissioner as having taken all reasonable steps to legally comply with legislation and do the best for their client.

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