How to catch a phoenix: new laws to combat illegal phoenixing

On 17 February 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 received Royal Assent, having passed both houses of parliament on 5 February 2020. The resulting Act now introduces powerful new laws aimed at curbing illegal phoenixing activity. It will also make directors personally liable for the GST liability of the company in certain circumstances.

This article provides a high-level overview of the changes. The phoenixing provisions (schedules 1 and 2) commenced on 18 February 2020, with director GST liability provisions (in schedules 3 and 4) to follow on 1 April 2020.

Overview

The Act:

  • introduces new criminal offences and civil penalty provisions for company officers who fail to prevent the company from making creditor-defeating dispositions, and for other persons who facilitate a company in making creditor-defeating dispositions;
  • allows liquidators to apply for a court order regarding voidable creditor-defeating dispositions;
  • enables the Australian Securities and Investments Commission (ASIC) to make orders to recover, for the benefit of a company’s creditors, company property disposed of or benefits received under voidable creditor-defeating dispositions;
  • prevents directors from improperly backdating resignations or ceasing to be a director when this would leave a company with no directors;
  • enables the Commissioner of Taxation to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances; and
  • authorises the Australian Taxation Office (ATO) to retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount of a refund.
Creditor-defeating dispositions

The new laws introduce the concept of a ‘creditor-defeating disposition’, which is a disposition of the company’s property for less than the lesser of market value or the best price reasonably obtainable for the property, which has the effect of preventing, hindering or significantly delaying the property from becoming available to meet the demands of the company’s creditors. The regime applies both as an extension to a liquidator’s powers under the existing voidable transaction regime and as a duty on directors and officers to prevent creditor-defeating dispositions (similar to insolvent trading), meaning that both the other parties to the transaction and the directors can be liable.

Recognising the practical difficulties faced by liquidators and ASIC where company officers or advisors obscure facts by concealing or destroying records, a disposition is presumed to be not for market value or the best price achievable if the company fails to maintain adequate records regarding the transaction.

Extension of voidable transactions

Once a transaction is found to be a creditor-defeating disposition, on the application of a liquidator, a court may void the transaction. Any transaction entered into in the 12-month period ending on the relation back day, made at a time when the company is insolvent – or because of the transaction, becomes insolvent – is voidable. In addition, a transaction that directly or indirectly caused the company to enter external administration less than 12 months later is also voidable and does not require liquidators to prove insolvency at a particular point in time, thereby reducing the burden of proof.

The new laws also limit the circumstances in which the common defences to voidable transaction claims in section 588FG(1) & (2) apply (good faith and lack of grounds to suspect insolvency) if it is unnecessary to establish that the company was insolvent because the company entered external administration within 12 months of the disposition.

Duty to prevent creditor-defeating dispositions

The new laws impose a positive duty on directors and officers to prevent the company from entering into a transaction that is a creditor-defeating disposition. The prohibition extends to persons who procure, incite or encourage the transaction, and may therefore capture pre-insolvency advisors, lawyers or others who assist in the phoenixing. A breach of the provisions is an offence under the Act, and a court can also order compensation to be paid to creditors that is equal to the loss or damage suffered (similar in some respects to insolvent trading, but with wider application). Various exceptions apply (outlined below).

The purpose of this prohibition, as outlined in the explanatory memorandum, is to address the actions of ‘unscrupulous facilitators and pre-insolvency advisers’ – who, while not formally responsible for the management of a particular company, are responsible for designing and implementing illegal phoenix schemes.

Exceptions – when dispositions are not voidable

The new laws exempt genuine restructures. Where there is court or creditor oversight, the transaction is also typically protected. Accordingly, if the transaction was entered into under a deed of company arrangement or by an administrator, liquidator or provisional liquidator of the company, then the transaction is not voidable.

The new laws also extend the operation of ‘safe harbor’ laws to creditor-defeating dispositions. A court cannot make an order voiding a creditor-defeating disposition if the safe harbor provisions apply.

Administrative orders by ASIC

To (apparently) overcome commercial difficulties faced by liquidators with insufficient funds, the new laws empower ASIC to issue an administrative order that can require a person to:

  1. return any money to the company for distribution;
  2. pay an amount equal to the benefit the person received from the creditor-defeating disposition; or
  3. transfer the property that was purchased with the proceeds of sale of a creditor-defeating disposition.

An administrative order may be issued on the request of a liquidator or on ASIC’s own motion. An amount payable by a person under an administrative order can be recovered as a debt by an action against the person in court. The Official Receiver has had a similar power (in some respects) for some time to issue a notice under 139ZQ of the Bankruptcy Act 1966 at the request of a trustee in bankruptcy.

A failure to comply with an administrative order is an offence. A contravention is subject to a penalty of up to 60 penalty units.

The same exceptions to the voidable transaction powers also apply to ASIC’s administrative orders. Accordingly, ASIC cannot issue an administrative order if one of the exceptions above applies (eg safe harbor, made under a DOCA etc).

Challenging administrative orders

A recipient of an administrative order may apply to the court to set the order aside if it has been erroneously made. In such a proceeding, a court will examine, among other things, whether there is a creditor-defeating disposition. Strict limitation periods apply, and a person will only have 60 days to make a court application to have the administrative order set aside.

Restriction on directors abandoning companies

The new laws impose stringent obligations to notify ASIC of a director’s resignation and provide that the resignation will take effect on the day the person resigned only if, within 28 days of the resignation, ASIC is notified. If ASIC is not notified within the 28-day period, the resignation is ineffective, and the director remains a director until ASIC is formally notified.

On application by a director, a court or ASIC may give effect to the resignation on the date of the resignation. Strict timeframes apply to make such an application and the criteria go beyond proving that the person in fact resigned on that day. Rather, the court will also have regard to whether it is just and equitable for the resignation to be effective. In circumstances of mere delay or inadvertence in notifying ASIC, it will unlikely be just or equitable for the court to give effect to the resignation.

The new laws also prevent a director from resigning where he or she is the last remaining director of the company. Where the person who purports to resign is a sole director of the company, the resignation will be ineffective.

The purpose of these amendments is to prevent company directors from ‘abandoning ship’ to avoid any potential liability.

Extending personal liability of directors to unpaid GST liabilities

Currently, a director may be personally liable for unpaid PAYG withholding taxes and superannuation if he or she fails to put the company into external administration promptly or fails to comply with a director penalty notice. The new laws now extend this personal liability regime to unpaid GST liabilities.

Accordingly, the new laws impose a personal obligation on directors to ensure that the company meets its GST obligations. This personal obligation arises at the end of the relevant tax period or GST quarter and continues until:

  1. the company complies with its GST obligations;
  2. an administrator is appointed to the company; or
  3. the company begins to be wound up.

As with SGC and PAYG liabilities, a ‘lock down date’ applies. After this date, placing the company into external administration will not absolve a director from personal liability. In the case of GST, the lock down date is three months after the end of the GST quarter or at the end of the relevant tax period.

In the event that a director penalty notice (DPN) is issued, the lock down date will be 21 days after the DPN was issued. These new GST provisions will come into effect on 1 April 2020.

Transactions pre-18 February 2020

Certain transitional provisions apply to the new laws. Accordingly:

  1. the extension of the voidable transaction provisions to include ‘creditor-defeating dispositions’ only applies to debts incurred or dispositions made after 18 February 2020, in accordance with the transitional provisions provided in the Act; and
  2. the restrictions on the resignation of directors provisions will only take effect 12 months after 18 February 2020.
Key takeaways

The new laws will give significant powers to ASIC and liquidators to deal with any illegal phoenixing activity. As discussed above:

  1. A new type of voidable transaction will be created and a liquidator, on application to a court, may unwind any creditor-defeating dispositions.
  2. A duty will be imposed on directors and officers to prevent creditor-defeating dispositions, and the duty will extend to other persons who procure, incite, induce or encourage the making by a company of a creditor-defeating disposition. The laws may therefore capture pre-insolvency advisors, lawyers and other advisors who advise the company in the transaction.
  3. ASIC, on its own motion or at the request of a liquidator, may issue administrative orders requiring a person to return any property subject to a creditor-defeating disposition. This will be an effective tool, particularly where a liquidator has limited funds.
  4. A director’s resignation will be ineffective unless ASIC is notified promptly and he or she is not the sole director of the company.
  5. Directors will be personally liable for any unpaid GST liabilities of a company after the relevant ‘lock down date’.

Disclaimer

This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

The Authors

Jarrod Munro

PARTNER, MELBOURNE

Radhika Kanhai

PARTNER, MELBOURNE

Adrian Lee

LAWYER, MELBOURNE

Key Contacts

Radhika Kanhai

PARTNER, MELBOURNE

Andrew Sutherland

PARTNER, SYDNEY

Paul Evans

PARTNER, BRISBANE