The illegal phoenixing regime

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Amending Act) came into force on 18 February 2020 and was designed to prevent illegal phoenixing activity.  The Amending Act introduced reforms such as creditor-defeating disposition provisions to combat phoenixing activity.  Additional provisions amending the Corporations Act 2001 (Cth) were aimed to encourage accountability by preventing the resignation of directors when there is no replacement director in place.

What is phoenixing activity?

Phoenixing activity can be defined as the purposeful removal of assets and subsequent transferring of them to a new company before liquidation to avoid liabilities owed by the company to its creditors.

What are the amendments?

The Amending Act amended the Corporations Act 2001 (Cth), with the key changes aimed at circumventing phoenix activities to:

• include a voidable transaction for “creditor-defeating dispositions”;
• establish new criminal offenses and civil penalty provisions;
• encourage the Australian Taxation Office (ATO) to retain refunds; and
• enable ASIC to possess the power to punish parties that engage in phoenix activities.

An overview of the regime is discussed below.

What is creditor-defeating dispositions?

A new voidable transaction for “creditor-defeating dispositions” was introduced to capture a disposition of property where the consideration that had been paid for property is less than its market value, or the best price reasonably obtainable for the property; and it had the effect of preventing, impeding or greatly delaying the property from becoming available to meet the demands of the company’s creditors in winding-up.  This is extended to situations where the transaction creates property that did not exist before, and consideration for the disposition passes to a third party.

A “creditor-defeating disposition” will be a voidable transaction if certain criteria relating to the solvency of the company has been fulfilled.   These criteria are set in reference to a twelve (12) month relation back period.

What are the criminal and civil penalty provisions?

Criminal and civil penalty measures were introduced to combat phoenixing activities.  A criminal penalty applies where:

• an officer of a company engages in conduct that results in the company making a creditor-defeating disposition of property of the company according to section 588GAB(1);
• a person engages in conduct of procuring, inciting, inducing or encouraging the making by a company of a disposition of property that results in the company making the disposition of the property according to section 588GAC(1); and
• a person fails to comply with an ASIC administrative order according to section 588FGAA.

A civil penalty applies where:

• an officer of a company engages in conduct that results in the company making a creditor defeating disposition of a company’s property according to section 588GAB(2); and
• a person engages in conduct of procuring, inciting, inducing or encouraging the making of a creditor defeating disposition of a company’s property according to section 588GAC(2).

The provisions where a person engages in conduct of procuring, inciting, inducing or encouraging the creditor defeating disposition of a company’s property, are applicable to professional advisers such as lawyers, accountants, and pre-insolvency advisors.

What powers does the Australian Taxation Office (ATO) have to recover unpaid tax liabilities?

The Amending Act has provided the ATO with enhanced powers to recover unpaid tax liabilities.  These measures including:

• the extension of director penalties to encompass unpaid PAYG withholding amounts;
• authorising the ATO to retain tax refunds if the taxpayer has ATO lodgements and/or disclosure that are outstanding; and
• allowing the Commissioner to collect estimates of anticipated GST and recover it directly from directors through the company’s GST liabilities.

What powers does the regulator have to recover unpaid tax liabilities?

The Amending act provides ASIC with the power to recover property received in a voidable creditor-defeating disposition and retain refunds.  ASIC may order the recipient of the property on its own initiative or at the request of a liquidator to:

• return the property;
• pay a sum representing the benefit the recipient has received to the company; or
• transfer to the company property purchased with the proceeds of the creditor-defeating disposition.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth)

Cases

Hotait v Commissioner for Fair Trading, Department of Finance, Services and Innovation [2020] NSWCATOD 36

Re Intellicomms Pty Ltd (in liq) [2022] VSC 228

Further information about illegal phoenixing

If you need advice on combatting illegal phoenixing, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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