Is your company director resignation masking illegal phoenix activity?

One of the key responsibilities of being a company director in Australia is to ensure that the company does not trade while insolvent. Laws passed earlier this year tightened regulations around resigning from a company in an effort to combat illegal phoenix activity, which the ATO estimates costs the Australian economy almost $5 billion each year.

Company directors take note: Phoenix company laws now in place

Illegal phoenix activity happens when a company director leaves a company or transfers the business of an existing company to a new company without paying market value. This leaves the debts with the old company as a way to avoid paying outstanding taxes, money owed to creditors, or employee entitlements. It is prevalent in industries such as building and construction, cleaning, hospitality and childcare services.

In early 2021 the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) was passed to amend the Corporations Act 2001 (Cth), providing regulators with greater power to combat illegal phoenix activity by company directors in Australia.

The global pandemic has caused immense financial stress on many businesses in Australia. It’s important for business owners to know that restructuring or closing your business to “rise from the ashes” can be a legitimate commercial strategy. This article focuses on illegal phoenix activity. 

Impact of illegal phoenix activity by Australian company directors

The ATO estimates the annual direct impact of illegal phoenix activity to be up to $5.13 billion, with an annual cost to employees in unpaid entitlements of up to $298 million. Not only are subcontractors, creditors, and employees left unpaid, but the wider community suffers as well. Outstanding taxes are unrecoverable, and taxpayers end up footing the bill for outstanding employee entitlements. 

Penalties for illegal phoenix activity

Penalties for illegal phoenix activity are severe and include large fines and up to 15 years’ imprisonment for company directors and secretaries.

In September 2021, three men were sentenced to between 4-8 years in jail for conspiring to defraud the Commonwealth of $4.62 million in an orchestrated and elaborate illegal phoenix operation. They had set up multiple labour-hire companies to service vineyards, fruit and vegetable growers and meat processors. They failed to pay GST despite charging it to clients, and PAYG withholdings despite detailing these withholdings on employee payslips. They continued to withdraw cash from the businesses frequently meaning there were insufficient funds at the time of liquidation to enable the outstanding tax debts.

Company directors’ responsibilities under the new laws

Notify ASIC of resignation within 28 days

The company director must notify ASIC of their resignation within 28 days of resigning. Failure to do so means ASIC won’t recognise the original date of resignation but instead the notification date. For example, if a director resigned on the 1st June 2021 but did not notify ASIC until 10th July 2021, ASIC would recognise the date of resignation as 10th July as more than 28 days had elapsed. 

This change is important legally because the company director continues to be a director up until the date of resignation ASIC recognises. Thereby the director can be held accountable for any actions taken by the company up to that date.

Resignation where the company will be left with no director

Under the new section 203CB, a company director’s resignation will be void if it means the company is left with no director at the “end of the day”. The “end of the day” means that if multiple directors resign on the same day, leaving no director of the company, then all of the directors’ resignations are void. Directors may only leave a company with no directors if a new director is appointed by the end of the day.

There are limited exceptions:

  • the company is being wound up
  • the last remaining director is deceased
  • the person never consented to act as the company’s director.

The new section 203CA also provides that a resolution by members of a proprietary company to remove a director will be void if the company doesn’t have a director by the end of the day. This prevents situations where a director is the only shareholder and resolves to remove themselves as director.

It’s also important that directors are aware of the composition of a company’s board to avoid being the last director standing, as they will be unable to vacate their position.

Closing or restructuring a business is legal! 

If you are considering a business restructure, it’s best to discuss your options with an experienced commercial lawyer. There are legitimate ways to rescue your business, especially amidst the financial stresses caused by the COVID-19 pandemic. 

Our Sydney commercial and corporate lawyers advise business owners and company directors on legal strategies to restructure or close a company and provide peace of mind during a period of significant change. 

 

Any decision that affects your business has legal implications. Contact us today to help secure your business for whatever tomorrow brings.

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