The Australian Tax Office (ATO) is using an innovative legal weapon against "phoenix" companies. By winding a pheonix company up while still solvent, this tactic may help to prevent the transfer of assets out of the company.

The provisions being used by the ATO are common in many jurisdictions which derive their company law statute from the original English model.

Just and equitable

The Guss family conducted their furniture business through a series of companies. There was a history of running up tax debts in one company and, before the company could pay those debts, transferring the business to another company (and so on).

In 2001, the latest company in the chain (Casualife Furniture International) had run up tax debts. This time, the ATO decided to get in first. It applied to have Casualife wound up while it was still a going concern.

Despite its tax debts, Casualife was apparently trading profitably. Therefore, the ATO couldn't apply for winding up on the grounds of insolvency. So it decided to apply for a winding up on the "just and equitable" ground. In Australia, the "just and equitable" ground has hitherto tended to be used to resolve disputes between shareholders.

The ATO argued that it would be "just and equitable" to wind up the solvent Casualife because:

  • the ATO lacked confidence in the conduct and management of the company or its furniture business;
  • fairness required that the company be wound up; and
  • it would be conductive to commercial morality and in the public interest to wind-up the company:
    1. so that its affairs could be wound-up and brought under the control of a liquidator; and

    2. so that further commercial immorality could be prevented.

Commercial immorality

The Court described the Gusses' approach to tax as being almost like a game played with the Tax Office. That gamesmanship didn't stop once the ATO launched its case. A few weeks after the ATO began legal proceedings, Casualife paid its tax bill. It then claimed that it should not be wound up, because:

  • the ATO was no longer a creditor;
  • the company was solvent (and had a number of employees); and
  • there was no reason to doubt that the company would meet its tax obligations in future.

The Court disagreed. It ordered Casualife to be wound up:

"The Deputy Commissioner's lack of confidence in the defendants' likely observance of their taxation obligations is well justified in the circumstances. For that reason and also because it would be fair to do so, it is appropriate to order winding up. If the defendant companies were not wound up they would continue operating in the public domain under the same Guss control who would, I find, continue to engage by these entities in the same type of impugned conduct. I am also of the view that it is in the public interest and conducive to commercial morality that the companies be wound up, both to prevent the perpetration of further commercial immorality and for the benefit of having the companies under the control of a liquidator."

Implications

There is no doubt that Casualife was an extreme case. Nevertheless, the ATO probably has a number of phoenix companies on its records which would be almost equally susceptible to a "just and equitable" winding up application. It will be interesting to see if this is the start of a series of similar cases.

The decision has implications for other creditors, too.

Government authorities (revenue, workers compensation, etc) would have detailed records on phoenix companies that go back many years, and so would be in a similar position to the ATO. Trade unions and banks would also be in a position to identify some phoenix companies.

Trade creditors would be less likely to have detailed historical records showing a repeated pattern of phoenix activity. However, this decision merely opens the doors to "just and equitable" applications; it doesn't set any boundaries or limits, so it is quite possible that even less blatant activities than Casualife's may result in a court's ordering a winding up.

Even if trade creditors aren't in a position to initiate a "just and equitable" application, they will enjoy some benefits from the ATO's new power. Putting a liquidator into a company before it had its assets stripped would increase the chance of there being a pool of money available to pay all creditors.

As mentioned above, the "just and equitable" ground for winding up is found in the company law statutes of many countries in the common law world. Winding on grounds other than insolvency is also possible under a number of other powers (eg, a public interest application by the Australian Prudential Regulatory Authority or, in England, a public interest petition by the DTI).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.