TGIF 28 February 2020: The fall of the phoenix? Parliament passes new laws aimed at combating illegal phoenix activities

This week’s TGIF considers the recently enacted Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth), which bolsters the Australian government’s efforts to combat illegal phoenix activities.   

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth) (Amending Act) passed into law on 17 February 2020, over a year after it was first introduced to Parliament.   

Placing phoenix activity firmly in its crosshairs, the Amending Act introduces long anticipated reforms to Australia’s efforts to curb phoenix activity.  

Background 

The Australian government has long been concerned about Australia’s inability to adequately deal with phoenix activity.   It is estimated that phoenix activity cost the Australian economy billions of dollars every year.

Phoenix activity is, in short, the deliberate stripping and transferring of assets to a new company prior to liquidation, done to avoid any liabilities owed by the company in liquidation to creditors.

Clipping the wings of the Phoenix 

The Amending Act primarily amends the Corporations Act 2001 (Cth). The core objective of the Amending Act is to “detect and disrupt phoenix activity, and to prosecute directors and other professional advisors who engage in or facilitate the activity”.  

To this end, the amendments seek to combat phoenix activity by:

• adding a new voidable transaction for “creditor-defeating dispositions”;
• introducing new criminal offenses and civil penalty provisions; 
• empowering the ATO to retain refunds; and
• granting ASIC new powers to punish parties who engage in phoenix activities.   

We give a brief overview of each of these changes below.

“Creditor-defeating dispositions”

The Amending Act introduces the term “creditor-defeating dispositions” to capture the a disposition of property where:

• the consideration paid for the property was less than the market value of the property or the best price reasonably obtainable for the property; and
• the disposition had the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up.

The Amending Act also extends the definition to situations where: 

• the transaction creates property that did not previously exist; and
• consideration for the disposition passes to a third party.

Like other voidable transaction provisions, a creditor-defeating disposition will be a voidable transaction if certain criteria regarding the solvency of the company are met.  These criteria are set out by reference to a 12 month relation-back period. 

Criminal and civil penalty provisions 

The Amending Act introduces a suite of criminal and civil penalty measures aimed at circumventing phoenix activities.

A criminal penalty may apply where:

• an officer engages in conduct that results in the company making a creditor-defeating disposition; 
• a person procures, incites, induces or encourages the company to make a creditor-defeating disposition; and
• a person fails to comply with an ASIC administrative order made under the changes introduced by the Amending Act. 

A civil penalty may apply where:

• an officer of a company engages in conduct that results in the company making a creditor-defeating disposition; and
• a person procures, incites, induces or encourages the company to make a creditor-defeating disposition.

The provisions dealing with procuring, inciting, inducing and encouraging creditor-defeating dispositions have the potential to apply to professional advisers including lawyers, accountants, and pre-insolvency advisors.

Beefing up the regulator

The Amending Act grants ASIC new powers to intervene to recover property received in a voidable creditor-defeating disposition.  

At the request of a liquidator or at its own initiative, ASIC may order the recipient of the property to: 

• return the property;
• pay to the company an amount representing the benefit the recipient has received; or
• transfer to the company property purchased with the proceeds of the creditor-defeating disposition.

Extending the arm of the ATO

The Amending Act also equips the ATO with new powers designed to enhance its ability to recover unpaid tax liabilities.

These measures include:

• extending director penalties to encompass unpaid PAYG withholding amounts; 
• empowering the ATO to retain tax refunds in the event that the taxpayer has outstanding ATO lodgements and/or disclosures; and
• allowing the Commissioner to collect estimates of anticipated GST and, in certain circumstances, recover directly from the directors the company’s GST liabilities.

Comment

Time will tell how these reforms will play out in practice.  It is clear that the changes present new opportunities for liquidators’ actions against directors and officers (and their advisers), and beef up ASIC’s powers in relation to phoenix activity.