As a further step towards combatting illegal phoenix activity, the ATO has sent a clear message to accountants, pre-insolvency advisors and other ‘facilitators’ that they are firmly in the Commissioner’s cross-hairs.
Recently, ATO Assistant Commissioner Scott Parkinson foreshadowed further “access visits” (ATO code for search warrants), aimed squarely at the advisory space around company ‘re-birthing’; suggesting if the pre-insolvency industry cannot do more to clean itself up voluntarily, the ATO will.
Working hand-in-glove with other regulators, the ATO seems buoyed by the results of recent search warrants executed in Queensland, as well as ASIC’s success in obtaining a conviction against a Gold Coast pre-insolvency advisor who had aided a director to conceal assets from a liquidator.
But how does pre-insolvency advice interact with the more commonplace situation of advice provided by accountants (and for that matter solicitors) to their clients in respect of business structuring arrangements? Is there potential for exposure?
The Corporations Act 2001 specifically provides for accessorial liability to attach to those persons who are ‘involved’ in a director’s contravention of the Act in respect of specific duties to which company directors are bound. The relevant section, section 79, draws from the criminal law and establishes four preconditions to a finding of ‘involvement’ against a third party.
However, despite the reasonably expansive language used in section 79 (refer for instance to subsection (c) of that section), the courts have traditionally applied section 79 and other similar legislative provisions, with considerable restraint.
So how in practice might this impact accountants and others, who go about assisting clients with asset protection arrangements, particularly where the question of insolvency is relevant? From a liquidator’s perspective, the statute and case law would appear to support a requirement to give thought to the company’s solvency position before embarking on any potentially questionable transaction.
Where the spectre of insolvency is unavoidable, substantial caution is required. Liquidators come armed with a suite of legislative implements designed to provide a means to ‘reach back’ into a company’s history to restore assets and undo transactions for the benefit of creditors.
The clear policy intent now articulated by both ASIC and the ATO, is to prevent the disposition of assets that might otherwise be available for the payment of creditors (principally employee entitlements). As the most common creditor (and often largest) in SME corporate insolvencies, the ATO obviously has a vested interest in the outcome.