Illegal phoenix activity refers to the creation of new companies to continue running the previous business or businesses of deliberately wound up companies, to avoid paying their outstanding debts. The Australian economy is significantly affected by this issue, with the specially created Phoenixing Taskforce estimating that in 2015-2016, the problem cost between $2.85 billion and $5.13 billion.
In line with the measures announced in the 2018 Federal Budget, the Government has recently released draft legislation for a comprehensive package of reforms to combat this issue: the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018 (the Bill).
The proposed reforms focus on both deterrence and disruption of illegal phoenixing, in addition to providing harsher penalties.
The key points that the Bill seeks to implement are as follows:
Newly created offences
The Bill proposes to improve the mechanisms available to target those who conduct and facilitate these illegal transactions. In doing so, the Bill proposes to amend the Corporations Act 2001 (Cth). The amendments introduce new civil and criminal offences attaching the highest penalties available under law for the following:
- Company directors engaging in creditor‑defeating transfers of company assets that prevent, hinder or significantly delay creditors’ access to those assets.
- Any person who procures, incites, induces or encourages a company to make creditor‑defeating transfers of company assets (this includes pre-insolvency advisers and other facilitators).
Recovery by ASIC
These new offences will be reinforced by an extension of the existing liquidator asset clawback avenues covering illegal phoenix transactions.
In addition to this, the Australian Securities and Investments Commission (ASIC) will receive a new regulatory tool to recover property that has been transferred under illegal phoenix transactions. This tool is anticipated to include specific powers to make orders to recover property disposed of or benefits received under a voidable creditor-defeating disposition. It will be interesting to see how these powers will interact with the doctrine of indefeasibility of Title for real property assets.
Restrictions on directors and related creditors
Company officers will be subject to a number of important safeguards to ensure they do not affect legitimate businesses and commercial transactions. These will include measures to prevent directors backdating their resignations to avoid personal liability for company GST and liabilities, as well as preventing sole directors from resigning and effectively leaving their company an as empty shell.
Related creditors (meaning creditors who are ‘related’ to the phoenix company) will also be affected, with the Bill restricting their voting rights at meetings regarding the appointment or removal and replacement of a liquidator.
Extension of ATO power
Along with the recent introduction of GST withholding on the sale of new residential property, the Bill proposes to extend the Australian Taxation Office’s existing power to retain refunds where there are outstanding tax lodgements, noting that these powers are already extremely wide.
The legislation is set to closely target those who misuse the corporate forum, and we will keep you updated as it progresses in the near future.