ASIC takes action against Director for Illegal Phoenixing

Summary

In 2017, ASIC and the ATO announced new measures would be implemented to crackdown on those engaged in phoenxing activity, including the introduction of director identification numbers which will allow authorities to track the activities of individual directors through various Government databases.

ASIC is also considering other measures, such as prohibiting the backdating of director appointments, prohibiting directors from resigning leaving the company with no directors, and potentially implementing a “first cab off the rank” appointment process for Liquidators, to avoid directors appointing “friendly” liquidators who may not report suspected breaches to ASIC.

A recent Court decision shows that ASIC is indeed proactively taking action against directors who engage in illegal phoenixing activity.

Background

In this particular case, company director Mr Meaden was convicted and fined after pleading guilty to dishonestly using his position as a company director.

Mr Meaden was the sole director of Brimarco Pty Ltd (“Brimarco”) which operated a designing, engineering and manufacturing business that specialised in purpose built product vehicles.

Brimarco was placed into liquidation and a report from the liquidator of Brimarco was sent to ASIC.

ASIC investigated the situation and claimed that just prior to Brimarco being placed in liquidation, Mr Meaden had engaged in illegal phoenix activity by transferring $34,800 from Brimarco to Tough As Pty Ltd, to a related entity, of which Mr Meaden was also the sole director, knowing that Brimarco owed in excess of $2 million to its creditors. In doing so, ASIC alleged that the transfer was dishonest to gain an advantage for Mr Meaden before Brimarco went into liquidation.

Following the transfer of funds, Brimarco was also unable to pay employee’s wages and other entitlements.

Decision

Mr Meaden was convicted under section 184 of the Corporations Act and fined $5,000 for dishonestly using his position as a director of a company. As a result of his conviction, Mr Meaden is automatically disqualified from managing corporations for the next 5 years.

Key Takeaway

If you are considering transferring assets of your company to a related entity in circumstances where the company is or may soon become insolvent, it is imperative that you have a reasonable commercial basis for the transfer in order to prove that you did not act dishonestly or with an attempt to defeat creditors. One possible strategy is to ensure that the assets are sold to the related entity at market value.

Alternative Structures

There are many structures that can be put in place upfront to protect the assets of a business from claims made by third parties, including creditors. A common structure is to hold all of the assets of the business in one company (asset company), and then trade the business (such as enter into contracts, employ staff) through another company (trading company). The asset company licences the trading company a right to use its assets in its business, however the licence can be revoked in the event the trading company becomes insolvent or a claim is made against it. In certain circumstances, the asset company’s ownership of the assets licenced must be registered on the Personal Property Securities Register otherwise the asset company may lose the assets in the event of the trading company’s insolvency.

Another option is to have an asset company and a trading company, with a holding company sitting above them. The holding company is the sole shareholder in each of those two entities. The benefits of this structure is that all entities can be consolidated for taxation purposes, and therefore only one tax return needs to be submitted.

The above structures are much simpler to implement when you first start a business and before you run into any issues, as implementing them later on when issues are on the horizon could ultimately be considered phoenixing and can also entail adverse tax consequences.

If you require any assistance with structuring your assets and risk protection, please contact our one of our team today.

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