In September 2017, the Commonwealth Government released a consultation paper proposing various amendments to Corporations Act (Act) which aim to increase the ability of liquidators and regulators to investigate illegal phoenixing.
This Alert provides an overview of the key proposed reforms.
What is illegal phoenixing?
Illegal phoenixing involves the directors of a company deliberately avoiding paying that company’s liabilities by transferring assets from that company to a new company, often controlled by the same directors. Typically, the indebted company is then placed into external administration and the same type of business is conducted under the new company structure.
The main proposed reforms
1. A new phoenixing offence
It is proposed to prohibit the transfer of property from one company to another where the main purpose of that transfer is to prevent, hinder or delay the process of dividing that property among the indebted company’s creditors. Such a transaction would be void against a liquidator, meaning the property could be clawed back in a liquidation.
The applicable defences could be that valuable consideration was given for the transfer, the transferee did not know, and could not reasonably have inferred, that the transferor’s main purpose in making the transfer was to avoid payment of creditors and the transferee could not reasonably have inferred that, at the time of the transfer, the tranferor was, or was about to become, insolvent.
In terms of enforcement, it is proposed that ASIC should be able to issue a notice on the company which has received property from the indebted company, requiring it to deliver up that property or money of the same value. The recipient could apply to the court to have that notice set aside.
The Government is proposing the following remedies if the new illegal phoenixing offence is found to have been committed:
- The ability for liquidators and ASIC to claw back property transferred to the new company;
- Liquidators, creditors and ASIC being able to seek compensation against directors of the indebted company and others knowingly involved in the offence, as well as the company that receives the property; and
- Criminal and civil penalties
3. Designated phoenixing offences
The consultation paper also proposes that breaches of certain existing provisions of the Act should become ‘designated phoenixing offences’, for example a breach of s.286(1) which requires companies to keep written financial records.
4. Former directors avoiding liability
It is proposed that the Act be amended to include a rebuttable presumption that if a notice advising of a change in director is lodged more than the requisite 28 days after the date of the director’s resignation, that director could still be held liable for misconduct occurring up to the date of lodgement. The responsibility for lodging such notices may also be given to the resigning director, rather than the company.
The government also proposes to amend the Act to prevent sole directors resigning from companies without first either arranging a replacement director or winding up the company. Because directors currently only need to notify the company, not ASIC, of their resignation, such abandonment provides an opportunity for illegal phoenix activity to take place during the period between the director’s resignation and the company being placed into external administration by a creditor or being deregistered by ASIC. The proposed amendments would either render such resignations ineffective or provide that they constitute an offence.
5. Higher risk entities
- Firstly, individuals will be designated as ‘Higher Risk Entities’ if they have engaged in certain conduct, including previously being disqualified from managing a corporation, engaging in the new ‘phoenixing offence’ or being an officer of 2 companies that have gone into liquidation in the previous 7 years.
- Secondly, the ATO will declare a Higher Risk Entity, as well as the company he or she controls, to be a ‘High Risk Phoenix Operator’, which would have a number of consequences. Significantly, a ‘cab rank system’ would apply to the appointment of liquidators by those directors, meaning that the director would only be able to select a liquidator from a pre-determined panel. Alternatively, a ‘government liquidator’ could be established to conduct external administrations of small-to-medium size companies.
6. Tax-related reforms
The paper also proposes various other reforms aimed at combating illegal phoenix activity within the tax sphere, which will not be addressed in detail in this Alert. In summary, they are as follows:
- The existing promoter penalty regime, which aims to deter promotion of tax avoidance schemes, is to be expanded to apply to promoters of illegal phoenix activity.
- The Director Penalty Notice Regime is to be extended to include a company’s unpaid GST liabilities, rather than just pay-as-you-go withholding tax and compulsory superannuation contributions.
- The ATO will be empowered to commence recovery proceedings against a director who has been identified as a High Risk Phoenix Operator immediately after issuing a Director Penalty Notice, without waiting for a 21 day notice period.
- The ATO will be able to retain refunds otherwise due to High Risk Phoenix Operators where they may have other outstanding tax liabilities.
- The ATO will have the power to issue garnishee notices with respect to security deposits that have been requested by the ATO to secure a company’s current or expected future tax liabilities.
Summary and more information
The proposed reforms will shift the focus from enforcement and prosecution to deterrence and disruption of illegal phoenixing. It is important that Parliament appropriately define any illegal phoenixing offence so that it does not target legitimate business rescue behaviour.
If you require advice in relation to the potential impact of these reforms, or any other insolvency or bankruptcy advice, please contact:
Brock Morgan | Senior Associate | +61 7 3338 7566 | email@example.com