Tough penalties for Directors involved in phoenix transactions

August 13, 2019 Roger Blow

The Federal Government has introduced into Parliament tough new criminal and civil penalties for Company Directors who engage in illegal phoenix activity.

Illegal phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements.

The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 will give the ATO, ASIC and liquidators a range of new powers to target directors, individuals and advisors who conduct illegal phoenix transactions, such as where a Director sells the assets of the company at less than market value (known as a creditor-defeating disposition).

The other key reforms include:

New powers to ASIC to recover property that is the subject of a creditor-defeating disposition and return it to the company for distribution to the creditors;
Preventing directors from resigning and leaving the company with no directors and from backdating their resignation to avoid personal liability;
Extending the existing director liability provisions by making directors personally liable for their company’s GST liabilities;
Increased power of the ATO to withhold tax refunds where tax lodgments are still outstanding.

Company directors and their advisers should be aware of the proposed changes.

Cove Legal provide specialist advice to clients facing possible insolvency outcomes or facing actual or threatened ATO debt action. If you are attempting to address director personal liability issues, director penalty notices, garnishee orders, winding up applications, statutory demands or need advice on an insolvency situation generally, speak to us today.

Roger Blow, Principal, Ph: +61 8 6381 0327 or roger@covelegal.com.au

This publication is not intended to provide and does not provide legal advice. You should seek professional legal advice relating to your specific situation(s) before taking any action based upon its contents.

The ATO's model litigant obligations

July 18, 2019 Roger Blow

With the ATO’s debt recovery powers again coming under fire in the press for being excessive, what rights does a small business have when the way the ATO handles its claims and litigation is considered to be contrary to its obligations as a ‘model litigant’?

The model litigant rules, or model litigant obligations, are guidelines for how a government body ought to behave before, during, and after litigation.[1] The ATO, like any other Commonwealth agency, is subject to model litigant obligations and has an obligation to:

act with complete propriety, fairly and in accordance with the highest professional standards in handling claims and litigation. This also requires that the ATO not start legal proceedings unless it is satisfied that litigation is the most suitable method to resolve a dispute. [2]

In Shord v Commissioner of Taxation [2017] FCAFC 167 Justice Logan discussed at length the role of the Commissioner and how he is to conduct proceedings to which he is a party. His Honour made the following comments with respect to model litigant obligations:

The ‘standard of fair play to be observed by the Crown in dealing with subjects’ in litigious business, termed the duty to act as a model litigant, antedates and, if anything, is more onerous than the duty which all parties and their lawyers have in proceedings before this Court to assist in the achieving of the ‘overarching purpose’ of facilitating the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible: s 37M and s 37N, Federal Court of Australia Act 1976 (Cth). [3]

His Honour went on to say:

Departures from model litigant behaviour can, in particular circumstances, constitute professional misconduct, a contempt of court or an attempt, contrary to s 43 of the Crimes Act 1914 (Cth), to pervert the course of justice. [4]

However, it has also been confirmed by the Courts that an alleged failure on the part of a Commonwealth Agency to act in accordance with its obligations does not exist in Australian law as a distinct cause of action. As a result, such failures (aside from a potential complaint to the Attorney General) can only be actioned via a request that the Agency pay the legal costs within existing proceedings, that it can be argued arise from the breach(es) of those obligations.

Cove Legal offers specialist expertise in the area of tax disputes and insolvency. We represent clients in Court winding up applications and bankruptcy petitions and provide strategic advice on ATO payment plans and all other aspects of ATO debt recovery action (such as director penalty notices, garnishee notices, freezing orders, default assessments, audit requests and ATO criminal prosecutions).

Roger Blow, Principal, Ph: +61 8 6381 0327 or roger@covelegal.com.au

[1] https://www.ruleoflaw.org.au/priorities/model-litigant-rules/

[2] https://www.ato.gov.au/General/Dispute-or-object-to-an-ATO-decision/In-detail/Avoiding-and-resolving-disputes/Litigation/Litigation---our-policies/

[3] Shord v Commissioner of Taxation [2017] FCAFC 167 at [169].

[4] Ibid at [174].

New Director ID laws proposed

April 11, 2019 Roger Blow

It is being proposed that all existing and future directors of registered corporations be required to apply for a permanent identification number which will keep track of their various directorships.

The Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019 proposes amendments to the Corporations Act 2001 making it compulsory for all newly appointed directors to apply for a unique Director Identification Number (DIN) within 28 days of becoming a director. For existing directors, it is proposed that there will be transitional provisions giving a currently appointed director 15 months to apply for a DIN once the new requirement commences. Those considering becoming a director within 12 months could also apply for a DIN.

With the current system, directors are only required to lodge their details with ASIC but there is no process in place to verify their identity. The new requirements will improve the traceability of a director’s relationship across all companies and allow the regulators to quickly investigate a director’s involvement in what may be repeated unlawful activity, in particular illegal phoenixing.

There will be civil and criminal penalties introduced for directors who do not have a DIN or that fail to apply for a DIN within the applicable timeframe. A director also commits an offence if they knowingly apply for multiple DIN’s or misrepresent a DIN to a registered body or government agency.

Whilst the draft legislation was introduced to Parliament in February, experts recommend that companies prepare for its enactment. We will keep you updated on its progress.

Cove Legal provides legal advice on a wide range of commercial issues. We specialise in dispute work, but Principal Roger Blow’s 20+ years working in some of the largest commercial law firms allows us to address a wide range of client legal needs with fee structures that are tailored to the commercial issues being addressed. Give us a no-obligation call to see if we can help.

Roger Blow

P: +61 8 6381 0326 or e: roger@covelegal.com.au

Tax Litigation Update

March 21, 2019 Roger Blow

At Cove Legal we are very active in the tax litigation space and two recent decisions particularly caught our eye.

Firstly in Arbuckle v Commissioner of Taxation [2019] WASC 7 Martin J dismissed Mr Arbuckle’s Appeal against the sentence imposed by the Magistrate’s Court.

The Court found that Mr Arbuckle’s long-standing failure to meet his tax obligations did warrant a 6- month suspended prison term. He was released on the undertaking to be of good behaviour for a period of two years.

In handing down the sentence, Magistrate Huston said he needed to “send a message very clearly to Mr Arbuckle that he needs to be discouraged from engaging in this form of unlawful behaviour ever again.”

“I also need to send a message to the broader community that the expectations in the legislation for lodging income tax returns and business activity statements is not something to fit in when life is convenient. They have to be prioritised because it’s a legislative requirement to do those things.”

The second decision is Deputy Commissioner of Taxation v Nore [2019] WADC 27 which saw the District Court dismiss an ATO summary judgment application against Mr Nore on the basis that there was sufficient uncertainties in the ATO’s case (despite the ATO claiming Mr Nore had no defence to the claim) to justify the matters being aired in court.

Mr Nore had been issued with a Director Penalty Notice with respect to a company that failed to remit superannuation guarantee charges. There are a number of steps a Director can take in order to avoid personal liability in that scenario. Some of those actions were undertaken by Mr Nore with the Court observing “In the circumstances … I am struggling to see what the defendant could have done.”

The two decisions perhaps sit at opposite ends of the true litigation scale: the Supreme Court showing a willingness to endorse custodial sentences for more serious personal tax omissions whilst the District Court is resisting the Commissioner’s attempts to rely upon his procedural/legislative advantages so as to prevent arguable defences from being properly considered by the Courts. Both show that tax disputes can very much turn on their own particular facts and circumstances and require specialist guidance.

Roger Blow

P: +61 8 6381 0326 or e: roger@covelegal.com.au