Director Liability and Phoenixing

There has been a lot of talk in 2018 about increased company Director liability and the scourge of corporate phoenixing. Is it all doom and gloom? We take a look at what it all means.

Director Liability

There was a time when Directors were almost impossible to touch. That was decades ago and in the ensuing period, Directors have been made subject to more and more liability. Rarely a year goes by that the liability of Directors is not extended in a significant manner.

The 2018 Federal Budget introduced a new measure to combat phoenixing. Primarily these measures are aimed at the Directors of companies involved in phoenixing. The primary measure is the extension of the Director Penalty Notice system to include GST, Luxury Car Tax and Wine Equalisation Tax. Given that the government is expecting major cash inflows as a result of these change, you can be assured that they will be heavily applied.

The problem with this is that many innocent people could get caught in this trap simply by being uninformed. If your company or corporate trustee is not travelling well, the message is simple – “Get advice now”. Too little, too late is the biggest problem in dealing with insolvency.

Phoenixing

Project Phoenix was a taskforce that brought together key federal and state agencies. They defined a phoenix as “One company taking over the business of another company that is wound up or abandoned. It is a situation where the controllers of both companies are the same people or their associates with the new business arising from the ashes of old one having shed debts and other obligations.”

They further identified three categories of phoenixing.

  • Legal Phoenix—a business rescue that gives a better outcome for creditors and society in the business continuing to operate rather than the end of the business. Usually, this is achieved through the voluntary administration process under the Corporations Act 2001.
  • Problematic Phoenix—a repeated resurrection of a business by inadequate management. Controller/s tend to be individuals with poor business skills who are unwilling or unable to learn a lesson. There is no intention to defraud but the outcome is usually the repeated avoidance of debts such as unpaid monies owed to the ATO and/or state revenue taxes.
  • Harmful Phoenix­—illegal and involves the unpremeditated or premeditated intention to defraud creditors, which may also include other illegal activity.

Takeout

If you are a Director, you should be looking at sophisticated asset protection methods. In 2018 there will probably be around 10,000 corporate insolvencies. In the vast bulk of these events, there was no intention of going broke; but it happened anyway for a number of reasons. The notion that it won’t happen to me is about the poorest defence there is. For the most part, asset protection strategies are relatively inexpensive.

If you would like to know more contact Warren Maris on 07 3483 0100.

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