Dodgy Advisers – Watch Out!

Peter Hillig 22-08-2016

Australian Securities & Investments Commission (“ASIC”) is once again baring its watchdog teeth by taking steps to advise company directors who have been subjected to a winding up application about the risks of engaging untrustworthy advisers. In doing so, ASIC is writing to directors of companies subject to winding-up applications to advise of the risks of retaining dodgy advisers.

A preferred modus operandi of many financial advisers is to review publicly available information, including ASIC publications, to identify directors of companies which are about to be wound up and to reach out to them offering their services by cold-calling them.

In addition to avoiding the practice of permitting "bad apple" advisers to exploit company directors while they are particularly vulnerable, ASIC is attempting to stamp out illegal practices such as phoenix activity and the complicity of advisers in promoting illegal conduct and aiding and abetting directors in breaching their duties.

The policy reasons for this are obvious - permitting advisers to facilitate the breach of directors' duties and otherwise engage in illegal phoenix activities means that legitimate creditors are likely to be defeated in their claims and market confidence will deteriorate.
ASIC has demonstrated that it remains prepared to pursue and prosecute advisers that it suspects have been involved in such activities, notably in the recent Federal Court action taken against the director of Eagle Business Solutions Pty Ltd ("EBS").

Stephen Charles Hall, the director of EBS, came to ASIC's attention after it was found that he had used a similar technique to that described above to engage a new client already subject to a winding-up order by the Deputy Commissioner of Taxation (“Commissioner”).

Unfortunately for everybody involved, as part of his services Mr Hall assisted the director of the struggling company to conceal the true ownership of assets from liquidators appointed by the Court, as well as facilitating the director to continue to use assets of the company for personal purposes - obviously a clear breach of his director's duties. 

Mr Hall's "assistance" extended to creating and implementing a scheme for his client to transfer assets owned by his company to his wife. The intention was for those assets to appear to have been transferred some years previously, and the director was then to open a new company using those transferred assets, thereby defeating his legitimate creditors.
The plan quickly became unstuck when the company director dated the transfer document - purportedly relating to a sale which occurred in 2009 - as 4 October 2013. Not only did this reveal the fiction of the original sale date but it also post-dated the winding-up application which had been filed by the Commissioner.

Mr Hall was charged with various offences under the Corporations Act 2001 (Cth) and the Commonwealth Criminal Code, including dishonestly aiding, abetting, counselling or procuring another director to breach their duties.  Mr Hall pleaded guilty to these offences, and was accordingly fined $6,600 and disqualified from managing a corporation for a period of five years.

Case Study - Deputy Commissioner of Taxation v Fitzgerald [2016] NSWSC 971

In the recent case of Fitzgerald, the Commissioner had sought the recovery of some $2m in relation to director penalties arising from failures to comply with section 269-15 of Schedule 1 of the Taxation Administration Act 1953 (Cth) ("TAA").

The relevant section of the TAA requires directors to ensure that a company pays all PAYG withholding-tax amounts to the Commissioner. A failure to do so entitles the Commissioner to issue a Director Penalty Notice (“DPN”) advising of a debt due. An inadequate response from the subject director permits the Commissioner to commence proceedings to recover the penalty 21 days after provision of the DPN. Crucially, legal precedent confirms that a DPN is deemed to have been validly served even if it was not in fact received by the addressee - so long as the DPN was posted to an address for a director as held in ASIC's records.

The director Fitzgerald maintained that he had not received any Notice of the penalties from the Commissioner and accordingly was not able to take steps to appoint an Administrator to the company in a timely fashion. He therefore denied that he should be liable for the penalty or any costs. One of his arguments was that the DPN was sent to an old address held on the ASIC register, and maintained that he had instructed his accountant to update his address with ASIC. However, no evidence was provided of this change and the ASIC register recorded no such update.

Because of this, the Court found that the DPN had been duly served and held that Fitzgerald was liable for the full penalty amount claimed and ATO's costs.

There are a number of important lessons from this case:

  1. If a company is not complying with its taxation obligations, seek immediate professional advice, as the financial consequences to the directors may be significant.
  2. Ensure ASIC address details are maintained correctly.
  3. Read and understood all notices issued by the ATO.  Leaving the head in the sand may prove very costly.
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