Who should read this eBrief:
- Company directors
- Accountants
- Financial Advisors
Proposed changes to Commonwealth legislation could have a significant impact on the potential for transferring assets out of one company into a new company to avoid paying liabilities. If enacted, the changes will give liquidators, ASIC, and the ATO new powers to prosecute culpable directors and associated persons. This change is the third tranche of corporate insolvency reform committed to by the Commonwealth government. To read about the first two tranches, visit our recent eBriefs:
- Insolvency Law Reform – Company Directors, and
- Insolvency Law Reform – Superannuation Guarantee Charge
What is illegal phoenixing?
Illegal phoenixing involves creating a new company then transferring company assets from an existing company to the new company for the purposes of making those assets unavailable to creditors of the existing company. The existing company is usually then put into liquidation (either voluntarily or by a creditor), but the business itself ‘rises from the ashes’ and continues to be carried on by the new company with the same ownership.
The annual direct cost of illegal phoenixing activity to businesses, employees, and the government was estimated to be between $2.85 – $5.13 billion in 2015-16. [1]
Not all transfers of company assets between companies are problematic. There may be perfectly legitimate reasons for moving company assets between companies including during a business restructure or under a deed of company agreement or scheme of company arrangement.
Isn’t phoenixing already illegal?
Yes. ASIC already has broad powers to prosecute company officers and employees who engage in illegal phoenixing activity under the current corporations law. A breach of the current law can attract civil penalties and an order to compensate the company for damage suffered by the company (in certain circumstances). Submissions have been made to the Senate Economics Legislation Committee which says there is no need for new legislation, but instead, the focus should be on enforcing the existing laws. [2]
However, Treasury says the new laws proposed in the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019, re-presented to Parliament on 4 July 2019, [3] will give regulators additional enforcement and regulatory tools to detect and disrupt illegal phoenixing and then to prosecute and penalise those who engage in or facilitate it. [4]
The Bill is targeted at ‘creditor-defeating dispositions’ of company assets only. It does not propose to restrict legitimate corporate restructuring activities.
What is the difference between illegal phoenixing and legitimate corporate restructuring?
The key issue is whether the transfer of company assets is a ‘creditor-defeating disposition’. Under the definition proposed in the Bill, a transfer will be a ‘creditor-defeating disposition’ if:
- The company assets were transferred for less than their market value or the best price reasonably obtainable; and
- The transfer prevents, significantly delays, or hinders, those company assets from being available to the company’s creditors in a winding up.
The reforms are only concerned with transfers of company assets that have both of the above characteristics.
What change does this reform propose to make?
New voidable transactions
The reforms create a new class of voidable transactions (which will allow liquidators to obtain compensation and other relief from ASIC or the Court) in circumstances where a creditor-defeating disposition of company property has occurred:
- when the company was insolvent;
- when the company became insolvent because of the disposition (or an act done for the purposes of giving effect to the disposition); or
- within 12 months after the disposition (or an act done for the purposes of giving effect to the disposition), the company goes into external administration as a result of the disposition (or act).
Dispositions of company property will not be voidable when made:
- under a scheme of company arrangement;
- under a deed of company arrangement;
- by a company administrator or liquidator; or
- in connection with a course of action that satisfies the safe harbour in corporations law.
New duties on directors/company officers
The reforms propose to impose a duty on directors and company officers not to engage in conduct that results in the company making a creditor-defeating disposition of company property if:
- the company is insolvent;
- the disposition (or a series of dispositions happening at the same time as the disposition) causes the company to become insolvent; or
- within 12 months of the disposition, the company goes into external administration or ceases to trade as a result of the disposition.
The duty does not apply where the disposition of company property was made:
- under a scheme of company arrangement;
- under a deed of company arrangement;
- by a company administrator or liquidator; or
- in connection with a course of action that satisfies the safe harbour in corporations law.
Where a director or company officer intentionally or recklessly makes the creditor-defeating disposition, the breach of the duty is a criminal offence. Where the conduct is not reckless but is just negligent, [5] civil penalties apply.
Accessories will be liable
Persons who were not directors/officers but who procured, incited, induced, or encouraged a creditor-defeating disposition, could also be liable, with civil penalties applying.
Prevent backdating of director resignations or sole director resignations
The changes will ensure directors are held accountable for misconduct by preventing the improper backdating of director resignations, and preventing the resignation of a sole director when this would leave the company with no director.
Personal liability for GST
The changes will allow the ATO to collect estimates of GST liabilities and make directors personally liable for their company’s GST liabilities (in certain circumstances).
What will the consequences be?
If the Bill becomes law, a person or company who breaches the illegal phoenixing provisions could be liable for the following civil and criminal penalties:
For an individual, either or both of:
- 10 years imprisonment; or
- a fine, being the greater of $945,000 or 3 times the benefit obtained (and detriment avoided) by that individual.
For a company, a fine, being the greater of:
- $9,450,000;
- 3 times the benefit obtained (and detriment avoided) by one or more persons reasonably attributable to the prohibited transaction; or
- 10% of the annual turnover of the company.
In addition, liquidators can obtain orders from ASIC and/or the Court requiring the transfer of the asset back to the company and/or the payment of compensation by the offending individual or company for damage suffered by the company.
What should you do?
The proposed changes to the law do not, and are not intended to, affect methods of restructuring which are currently valid and legal. The Bill maintains the safe harbour for directors as a defence against an alleged contravention of the insolvent trading prohibition. A safe harbour will also now extend to officers and other persons as a defence against an alleged contravention of the creditor-defeating disposition prohibitions.
Company directors, and company advisors (including lawyers, accountants, or pre-insolvency advisors), will need to be aware of the proposed changes and their impact.
Advisors could now be accountable alongside their clients as accessories to a creditor-defeating disposition and face fines and prosecution should they be found to have given the wrong advice.
Positive steps will need to be taken by company directors and company advisers in order to ensure those parties maintain compliance with the corporations law and avoid penalty.
Now is the best time for company directors to ensure their company’s GST tax obligations are up to date, and if contemplating a company restructure or a change in office, to seek proper advice from a lawyer, accountant or pre-insolvency advisor.
For more information contact the Dispute Resolution Team
Alisa Taylor Partner Dispute Resolution
(02) 6279 4388 Alisa.Taylor@MVLawyers.com.au
Harry Kay Special Counsel Dispute Resolution
(02) 6279 4469 Harry.Kay@MVLawyers.com.au
Courtney Noble Associate Dispute Resolution
(02) 6279 4324 Courtney.Noble@MVLawyers.com.au
- PricewaterhouseCoopers Consulting (Australia) Pty Limited (PWC), “The Economic Impacts of Potential Illegal Phoenixing Activity” July 2018. This report was prepared by PWC at the request of the Inter-Agency Phoenix Taskforce made up of all government agencies (32 Federal, State and Territory government agencies) that have an interest or role in monitoring and addressing potential illegal phoenix activities.
- Senate Economics Legislation Committee, Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 [Provisions], March 2019
- The Bill was originally presented to Parliament on 13 February 2019, but lapsed on 11 April 2019 due to the dissolution prior to the Federal election.
- Ibid.
- That is, a reasonable person in the position of the director/officer would have known that the transfer of assets was a creditor-defeating disposition.
MVironment: Do you really need to print it? This material has been prepared for the general information of clients of Meyer Vandenberg. It is not intended to take the place of professional advice and readers should not take action on specific issues in reliance upon any matter or information contained in it. © Meyer Vandenberg 2019
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