Combatting Illegal Phoenixing Bill receives royal assent
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The noose is tightening on illegal phoenix activity, as the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (“Bill”) received royal assent and commenced operation on 18 February.[i]
What has changed under the latest scheme to curb illegal phoenixing? How should you advise or execute corporate restructuring/winding up to stay on the right side of the law? Read on to find out.
What is phoenixing?
Phoenixing refers to the transferring of assets from a distressed company to a new company without adequate consideration, in order to minimise the property available to creditors in liquidation. As the old company is stripped bare, insolvent and eventually liquidated, the new trading entity would ‘rise from the ashes’ to conduct the same business as its predecessor without carrying any pre-existing liabilities, hence the analogy with the mythological bird that rebirths cyclically.
Why is phoenixing a problem?
Illegal phoenixing is estimated to directly cost the Australian economy between $2.85b and $5.13b annually.[ii] It is detrimental to the company’s stakeholders and the economy in the following ways:
- Employees suffer from non-payment of wages, superannuation and employee entitlements;
- Contractors and suppliers are unable to recoup costs for the goods and services provided;
- The government loses revenue due to unremitted taxes;
- Gives an unfair edge over competing businesses due to the evasion of obligations; and
- The economy suffers from the allocation of productive resources to unprofitable businesses.
With illegal phoenixing posing a significant challenge for the Australian economy, elaborate regulatory schemes have been introduced to tackle the problem in recent years, such as the establishment of a Phoenix Taskforce that coordinates 37 state and federal agencies to detect and investigate illegal phoenix activities.[iii] The Bill is the latest addition to that concerted effort.
Key measures introduced under the Bill
Creditor-defeating dispositions
The Bill introduces a new category of voidable transaction named “creditor-defeating dispositions”, which are transfer of assets that occurred within 12 months of a Company entering insolvency process and
- are for less than market value (or the best price reasonably obtainable); and
- have the effect of preventing, hindering or significantly delaying property becoming available to meet the demands of the company’s creditors in a winding-up;[iv]
Officers and advisors who made or facilitated the creditor-defeating dispositions now face new civil and criminal liability with harsh penalties attached. These new offences are aimed to supplement the existing voidable transaction provisions, which in practice are rarely used by liquidators to unwind apparent phoenixes due to the limited resources available to conduct investigations and the high burden of proof in a court of law.
In order to prevent legitimate corporate restructuring from being ensnared by the anti-phoenixing provisions, the legislation contains some carve outs. These include the recently introduced safe harbour provisions and transactions made with creditor or court approval, such as under a deed of company arrangement or scheme of arrangement.
New ASIC powers to recover property
To strengthen the penalty framework around misconduct in corporate insolvency, the Bill empowers ASIC to directly intervene where it determines that a liquidator is failing to appropriately recover company property. ASIC may exercise its newfound powers to order a person to:
- return the property to the company for distribution to its creditors;
- pay an amount equal to the benefit the person received from the creditor-defeating disposition; or
- transfer any subsequent property that was purchased with the proceeds of sale of a creditor-defeating disposition.[v]
Similarly to the exemptions around creditor-defeating dispositions, the Bill will ensure that “ASIC may not make an administrative order if the safe harbour would apply to the disposition or the initial disposition was for market value, or against a good faith purchaser in certain circumstances.”[vi]
Tax recovery reforms and limitations on director resignations
The Bill further bolsters ATO’s prospect to recover tax debt by authorising the Commissioner of Taxation to render culpable directors personally liable for their company’s anticipated GST liabilities via director penalty notice, and to retain tax refunds where a taxpayer has failed to lodge a return. The purpose of this amendment is to ensure that taxpayers meet their tax obligations and repay existing tax debt before being entitled to a tax refund.[vii]
Furthermore, the Bill has prohibited the improper backdating of resignations or the resignation of a director when such a resignation would leave the company with no directors.
Consequences of the amendments
The Bill represents yet another step up in the regulatory campaign to stamp out phoenixing and a reminder that corporate and financial misconduct will not be tolerated.
The Bill attempts to curtail illegal phoenixing activity without hampering entrepreneurship or legitimate restructuring activities. This is evident in the introduction of new offences and hefty punishments for phoenixing, balanced by various exemptions carved out to protect genuine structuring. Maintaining the fine balance between those two conflicting imperatives is challenging, especially given that the distinction between illegal phoenixing and legitimate corporate restructuring is often blurred.
The team at Collins Wentworth are experienced in business financial matters. If you have concerns about the financial position of your business and wish to know more about how we can assist you, contact us today.
[i] Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Parliament of Australia
[ii] Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 5 at [1.4].
[iii] Phoenix Taskforce, Australian Taxation Office
[iv] Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 15 at [2.12].
[v] Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 23 at [2.55].
[vi] Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 24 at [2.56].
[vii] Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 4.
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