Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019: welcome reforms to deter illegal phoenix activity

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By Stephen Dickens, Partner and Paris Galea, Lawyer

In recent years, unfortunately, illegal phoenix activity has become increasingly prevalent within Australia’s commercial landscape.

Despite its significant adverse effect on the nation’s economy, Australia’s statutory corporate insolvency laws have, to date, failed to adequately let alone comprehensively address, or even define, phoenix activity, or deter it.

This is set to change, however, given the Federal Parliament’s passing of the most substantive preventative measures to date in the form of the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (“the Bill”).

As its name suggests, the long-awaited legislation brings with it welcome changes primarily to the Corporations Act 2001 (Cth) (“the Act”) in a bid to curb phoenix activity.

The Bill encompasses various amendments to the Act which prohibit company officers engaging in “creditor-defeating dispositions” and penalises them and any person who facilitates such dispositions. Additionally, new powers are conferred upon liquidators and the Australian Securities and Investment Commissions to aid them in the recovery of property the subject of creditor-defeating dispositions.

The Bill, insofar as the amendments to the Act, will take effect the day after it receives Royal Assent, which is expected shortly.

Creditor-defeating dispositions

Whilst the term “phoenix activity” isn’t explicitly defined, central to the Bill is the concept of “creditor-defeating dispositions”.

Arising from the new section 588FDB of the Act, the term “creditor-defeating disposition” is defined as being the “disposition of company property for less than its market value (or the best price reasonably obtainable for it), which has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up.”

This concept is extended to include circumstances where a company makes a disposition of property to another person, who then provides some or all of the consideration to a third party.

Voidable transactions

A common outcome of illegal phoenix activity is that, after a creditor-defeating transaction occurs, a company’s officers quickly place their company into external administration. To defeat this trend, the Act now provides that a transaction will be voidable if:

  1. it is a creditor-defeating disposition;
  2. it was made at the time a company was insolvent or caused a company to become insolvent; and
  3. in the twelve months following the disposition, the company entered external administration.

Exceptions to this will be transactions entered into under a deed of company arrangement, by the company’s administrator or liquidator, or in connection with the safe harbor provisions of the Act (which have also been expanded upon to encompass the introduction of creditor-defeating dispositions).

Recovery options

The ability of creditor-defeating dispositions to be deemed voidable under section 588FE(6B) of the Act now affords liquidators a further avenue upon which to apply to the Courts seeking the recovery of assets for the benefit of a company’s creditors.

As is the case currently, this will be subject to the good faith test, to ensure that the rights of a party, who entered into the transaction in good faith without grounds for suspecting insolvency, are not prejudiced.

The possibility of recovery of property the subject of a creditor-defeating disposition is boosted by the new section 588FGAA of the Act. Under this section, the Australian Securities and Investments Commissions will be entitled to make an order, on its own initiative or at the request of a liquidator, for the return of property, or payment of a sum which represents some or all of the benefit a person has received because of the disposition.

As the Explanatory Memorandum to the Bill notes, such amendments will help to safeguard creditors in appropriate cases and be a useful mechanism for liquidators who are unable to fund such actions, whilst providing comfort to the Australian Securities and Investments Commissions, which has the authority to intervene in appropriate circumstances (for example, when a liquidator is not able to intervene).

Offences, penalties and compensation

Further to the above measures, a host of duties, in addition to those prescribed under section 588G of the Act, have been introduced to specifically target the practice of asset-stripping a company to avoid meeting obligations to creditors, and deter those involved in such practices.

This includes the insertion of civil penalty provisions and criminal offences under sections 588GAB and 588GAC, which detail a duty to prevent creditor-defeating dispositions, as well as refrain from engaging in or procuring a creditor-defeating disposition.

Interestingly, the creation of these provisions and offences not only applies to company officers but to any person who facilitates such dispositions. This notable amendment puts “advisors” on notice of potential personal liability if they act in such a way as to facilitate such transactions.

In circumstances where the civil penalty provisions have been contravened insofar as a creditor-defeating disposition, sections 588J, 588K and 588M (insofar as a company officer) have been expanded to allow for claims for compensation against those who breach the provisions.

Moving forward

Having been passed on 5 February 2020, the Bill is subject to Royal Assent, which is expected within the coming weeks, if not days.

Understandably the above amendments represent only a broad overview of the some of the recent changes to the Act.

Keeping this in mind, if you are seeking advice regarding these comprehensive reforms, and what it might mean for you as an interested party, please feel free to contact our Commercial Disputes and Insolvency team.

For further information, please do not hesitate to contact us.

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