War on illegal phoenix activity: what you need to know about the new laws

18 February 2020

The Parliament recently passed new laws as part of the Government’s efforts to eliminate illegal phoenix activity in Australia. Powers and penalties to target the practice have been expanded under the legislation. For company directors considering restructuring, these changes serve to highlight the importance of seeking specialist and independent advice from a qualified expert like Mahoneys.

What is illegal phoenix activity?

Illegal phoenix activity is when the assets and undertakings of an existing company are transferred to a new company to avoid the payment of debts including taxes, employee entitlements and other payments owed to creditors. The assets are often conveyed to the new company for less than their fair value or in a way that favours the new company.

The Federal Government has been targeting illegal phoenixing for several years now because of the impact on the community. Those affected include employees that lose wages, super and other entitlements and suppliers that aren’t paid. Companies engaging in illegal phoenixing gain an unfair competitive advantage over other businesses while the Government loses revenue and is hit with increased enforcement and monitoring costs.

The new laws targeting illegal phoenixing

The new laws to target illegal phoenixing were passed by Federal Parliament on 5 February 2020. The ‘Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2020’ aims to stamp out illegal phoenix activity by creating a new type of voidable transaction called the ‘creditor-defeating disposition’. A voidable transaction is a transfer of assets or a payment that’s made when a company is insolvent, or that is detrimental to the company.

The new illegal phoenixing laws also increase the recovery powers of the Commissioner of Taxation by expanding the director penalty notice regime to include GST among other things.

Creditor-defeating disposition explained

There are three main elements to the new species of voidable transaction known as the creditor-defeating disposition.

1.  First, the disposition has a temporal element. It must be made within 12 months of the commencement of the winding up of the      company. We can put this time period in context by comparing it those of the extant species of voidable transactions still in existence:

    • an unfair preference for example, is voidable if it is made within six months
    • an uncommercial transaction is voidable if it is made within two years
    • an unreasonable director-related transaction or related-party insolvent transaction is voidable if it is made within four years

2.  Secondly, there is a commercial element to the creditor-defeating disposition. It looks at the consideration payable to the vendor company for the sale of the relevant property and whether it is lower than the lesser of the market value or the ‘best price that was reasonably obtainable’ in the circumstances. This test aims to give effect to the objectives of the new illegal phoenixing laws by preventing assets being disposed of for less than their fair value.

3.  Third, the disposition has the effect of preventing the relevant property from being available in the winding up of the vendor company, or hindering or delaying the process of making the relevant property available in those circumstances. This is an ‘effect’ element which is similar to the ‘unfair preference’ voidable transaction. It requires the creditor-defeating disposition to have an adverse effect on the winding up before the disposition is made voidable.

One big change from the existing voidable transaction regime is the ability of the corporate regulator, ASIC, to order that a transaction is a creditor-defeating disposition and make consequential orders, such as the return of property or payment of money equivalent to the value of the property. The existing voidable transaction regime confers no concomitant power on ASIC. ASIC’s orders can be set aside by a Court.

Directors are also under a new proscriptive duty not to engage in conduct that causes a company to make a creditor-defeating disposition. In addition to accessorial liability applying to a third party who is involved in a director’s contravention of duty, there is a new proscriptive duty applying to the world at large to not procure, incite, induce or encourage a company to make a creditor-defeating disposition.

Extension of the Director Penalty Notice regime

Before these new laws were passed, the director penalty notice regime applied to superannuation and withholding tax. The new anti-illegal phoenix activity laws now extend the director penalty regime to GST, luxury car tax and wine equalisation tax.

It’s important to note there is no change to the ‘lockdown’/’non-lockdown’ concepts.

What does this mean for company restructuring?

It is important for company directors to realise that restructuring is not a dirty word. It can still be done, successfully and lawfully. Directors still have options.  The law is complex and constantly evolving as evidenced by the new illegal phoenixing legislation. This serves to highlight that there is no substitute for qualified, objective and early advice from a insolvency law specialist like the highly-experienced team at Mahoneys.

If you are seeking advice on company restructuring or have any queries about the implications of the new illegal phoenix activity laws, then reach out to Ben Seccombe at Mahoneys on (07) 3007 3777 or bseccombe@mahoneys.com.au