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ATO AND ASIC RAIDS ON PROFESSIONAL ADVISORS LINKED TO PHOENIX ACTIVITY

Newsletter

by Paul Gidley15.08.16

Earlier this month, the ATO and ASIC conducted raids on 13 businesses and residences across the country in a bid to crack down on “pre-insolvency” firms that assist clients to avoid tax and encourage phoenix activity.

Approximately 120 ATO officers joined several ASIC officers on 11 August 2016, to carry out the raids, with the targets linked to two advisory firms that they allege are encouraging and facilitating tax avoidance and phoenix activity.

These raids demonstrate a continued commitment by ASIC and the ATO to investigate and prosecute professional advisors who aid directors in breaching their duties and who are involved in phoenix activity.

Earlier this year, ASIC was successful in bringing charges against the proprietor of a small Gold Coast business advisory firm. The proprietor pleaded guilty to several charges including dishonestly aiding, abetting, counselling or procuring another Director to breach their duties, resulting in a fine of $6,600 and his disqualification from being able to manage a corporation for five years.

ASIC’s investigations into the above found that the proprietor had cold-called a company Director who had received a winding up notification from the ATO. After being engaged by the Director, the now “advisor” aided the Director to dishonestly use his position as the company’s Director to conceal the actual ownership of company assets from the liquidator appointed to his company.

In doing so, the Director attempted to prevent the liquidator from realising assets of the company that could have been used to pay outstanding debts owed to creditors. It was found that the advisor had devised a scheme that showed the company had entered into a contract with the Director’s spouse whereby assets of the company were purportedly sold at a fictitious sale in 2009. The Director, however, dated the transfer document (which referred to the fictitious sale in 2009) as 4 October 2013, weeks after the winding up application had already been filed against his company.

So what is phoenix activity?

According to ASIC, illegal phoenix activity involves the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, taxes or employee entitlements.

The Directors leave the debts with the old company, often placing that company into administration or liquidation, leaving no assets to pay creditors.

Meanwhile, a new company, often operated by the same Directors and in the same industry as the old company, continues the business under a new structure. By engaging in this illegal practice, the Directors avoid paying debts that are owed to creditors, employees and statutory bodies (e.g. the ATO).

It is important to note that not all company failures will involve illegal phoenix activity. Where a business has been responsibly managed, but fails, a business may continue after liquidation by using another corporate entity without necessarily being involved in illegal phoenix activity.

According to ASIC, the key characteristics of illegal phoenix activity can include:

  • The company fails and is unable to pay its debts;
  • The company acts in a manner that intentionally denies unsecured creditors equal access to the company’s assets to meet and pay debts including transferring assets for little or no value; or
  • Soon after the failure of the initial company a new company commences which may use some or all of the assets of the former business and is controlled by parties related to either the management or directors of the previous company.

A recent example of Phoenix Activity

Recently, one of the principles of Shaw Gidley was appointed as liquidator to a company by order of the Court following a winding up application filed by the ATO. This company will be referred to as Company A.

Company A had been operational for some years and was controlled and operated by its sole director and shareholder.

Upon receipt of the books and records, our investigations identified that Company A entered into a documented sale agreement approximately 12 months earlier, whereby its assets were sold to a Company B. Company B is controlled and operated by the de-facto partner of the Director of Company A.

As consideration for the purchase of the assets, Company B assumed liability for all of Company A’s creditors, with the exception of the debt owing to the ATO. The liabilities assumed by Company B were greater than the value of the assets purchased.

Accordingly, Company A has acted in a manner that has intentionally denied the ATO equal access to the assets.

We are currently in the process of gathering all available information required by ASIC to enable a potential prosecution of all parties involved in the above.

What is ASIC doing to curb illegal phoenix activity?

 ASIC currently has a number of initiatives to curb illegal phoenix activity including:

  • Funding Liquidators – in certain circumstances, ASIC may provide funding to a liquidator to help them compile a report into the failure of the company;
  • Liquidators Assistant Program – as part of this program, ASIC works with the Liquidator to secure books and information of companies in external administration by making sure that the Directors comply with their legal obligations. Directors that fail to meet their obligations to provide books and records may face Court action; and
  • Identifying and deterring illegal phoenix activity – in July 2013, ASIC launched a new surveillance initiative aimed at deterring illegal phoenix activity in certain industries where allegations have been made. As part of this new initiative the “Inter-agency Phoenix Forum” was formed consisting of numerous government agencies including ASIC, the ATO, Australian Crime Commission and the Fair Work Ombudsman.

Further information as to ASIC’s initiatives and how to identify potential phoenix activity can be found on ASIC’s website at www.asic.gov.au.

Lessons for Advisors

It is imperative that proper advice is provided to companies in financial distress to ensure it is legal and ethically correct.

Working with companies experiencing financial distress and facing insolvency can be very complicated, especially given the risk of prosecution penalties. Advisors may wish to seek guidance from a qualified and specialised insolvency practitioner.

Shaw Gidley is one of the most experienced specialist insolvency firms with offices in Newcastle, Central Coast and Port Macquarie, with over 70 years of combined experience. If you or a client are experiencing financial distress, please contact us on 02 4908 4444 at the first available opportunity so we can help you to realise the best possible outcome.