Phoenixing amendments take effect

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) received Royal Assent on 17 February 2020.  The Act implements a number of measures targeted at ‘phoenix activity’, which ordinarily involves the transfer of assets from one corporate entity to another with the intention of defeating the interests of the first company’s creditors.  A July 2018 report by PwC estimated the annual direct cost to businesses, employees and government as a result of illegal phoenix activity to be between $2.85 billion and $5.13 billion.[1]

Creditor-defeating dispositions

The Act imposes a new duty on company officers to prevent ‘creditor-defeating dispositions’, which are defined as dispositions of property:

  • for less than market value (or the best price reasonably obtainable); and
  • that 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.

Creditor-defeating dispositions will be voidable, and company officers who breach the duty to prevent such dispositions may be subject to criminal liability (where the officer has been reckless as to the result of his or her conduct) or to a civil penalty: s 588GAB.  External advisers who procure a creditor-defeating disposition may also be subject to criminal or civil liability: s 588GAC.

The Act seeks to carve out legitimate restructuring activity by excluding dispositions by liquidators, and dispositions pursuant to court-approved schemes or deeds of company arrangement, from the concept of ‘creditor-defeating dispositions’: s 588GAB(3).  Further, the ‘safe-harbour’ provision in s 588GA will be extended to protect officers who dispose of property as part of a course of action reasonably likely to lead to a better outcome for the company.

In addition to making creditor-defeating dispositions a new species of voidable transaction, the Act grants ASIC the power to make administrative orders to unwind creditor-defeating dispositions: s 588FGAA.  ASIC will be able to exercise those powers on its own initiative or on the application of a liquidator.  Interestingly, the Australian Law Reform Commission and the Law Council of Australia have both questioned whether the making of such orders might involve the exercise of judicial power by ASIC, contrary to Chapter III of the Constitution.[2]

Other important amendments

In addition to the amendments concerned with creditor-defeating dispositions, the Act addresses several other important matters:

  • Schedule 2 addresses the improper backdating of director resignations, and director resignations in circumstances where the resignation would leave the company with no directors;
  • Schedule 3 enables the Commissioner to collect estimates of anticipated GST liabilities, and makes company directors personally liable for their company’s GST liabilities in certain circumstances; and
  • Schedule 4 authorises the Commissioner to retain tax refunds in circumstances where a taxpayer has failed to lodge a tax return, or has failed to provide other required information.

 

[1]           Explanatory Memorandum, Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth) at [1.4].

[2]           Australian Law Reform Commission, Corporate Criminal Responsibility (Discussion Paper No 87, November 2019) at [11.27];  Law Council of Australia, Submission No 3599 to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (13 March 2019) at [2.1]-[2.4].

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