Are you a Director wanting to rise from the ashes?

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If a company is having difficulty paying its employees, creditors or taxation liabilities, the directors may believe that one way out of the situation is to liquidate the company and commence trading under a new entity controlled by the same person or group, but free of debts.

A company seeking to avoid payment of its debts in this way is commonly referred to as a phoenix company. Phoenix companies take their name from the mythical bird which rises from the ashes and never dies.

Some directors mistakenly believe that liquidating a company and starting up a new company will provide an opportunity for rebirth and will allow them to wipe the slate clean so to speak.

However, recent amendments to tax laws strengthen the Commissioner of Taxation’s ability to make directors personally liable for the company’s taxation obligations.

The changes allow the Commissioner of Taxation to:

  1. Pursue directors where the company’s Pay As You Go (PAYG) withholding and superannuation guarantee remain unpaid; and
  2. Prevent directors from obtaining PAYG withholding credits where the company has an outstanding PAYG debt.

The changes provide:

  1. Greater protection of workers’ entitlements to superannuation; and
  2. A deterrent to directors looking at using phoenix companies to avoid payment of their taxation debts;

If you are a director of a company, it is important to ensure:

  1. That the company is able to pay its debts. Failure to do so may expose the director to severe penalties for insolvent trading;
  2. That the company pays all employee entitlements, creditors and other debts as and when they fall due;
  3. That the company maintains thorough accounting practices so that the solvency of the company and outstanding taxation, PAYG withholding and superannuation guarantee amounts are easily determined; and
  4. That the company’s accounts are up to date and undergo regular scrutiny by the company’s accountants.

For more information on directors duties, please do not hesitate to contact me.

Also, please see my previous blog on corporate governance and directors duties.