An update on the crackdown on illegal phoenix activity

Illegal phoenix activity broadly refers to the deliberate and systematic liquidation of a corporate trading entity which occurs with the intention to avoid tax and other liabilities, such as employee entitlements, and to continue the operation and profit taking of the business through other trading entities.¹

On 11 October 2017, the Turnbull Government proposed a package of legislative reforms to address illegal phoenixing behaviour in an effort to “deter and disrupt core behaviours of phoenix operators”.   

Since then, there has been some important developments in the anti-phoenixing space:

• in July 2018, the Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Cth) was passed into law, requiring GST on residential property purchases to bypass potential phoenix operators and be paid direct to the ATO by the purchaser;
• later that year, the Insolvency Practice Rules (Corporations) Amendment (Restricting Related Creditor Voting Rights) Rules 2018 was passed into law, and prevents related creditors unfairly influencing an external administration, for example by “stacking” votes on certain resolutions at meetings of creditors; and
• following a consultation process, the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 (Bill) was introduced into Parliament on 14 February 2019.

We have set out below an update on the Bill and some of the key issues for industry participants.

The "Anti-Phoenixing" Bill

The Bill proposes to give the Australian Securities and Investments Commission (ASIC), liquidators and the Australian Tax Office (ATO) new powers designed to combat illegal phoenix activity and prosecute those who engage in this activity as well as those who encourage or facilitate it.  

On 14 February 2019, the Senate referred the Phoenixing Bill to the Economics Legislation Committee (Committee) for inquiry and report.  The Committee published its report on 26 March 2019, recommending that the Bill be passed.

Key proposed amendments

If passed into law, the Bill will implement several broad measures to attempt to combat illegal phoenix activity.

Schedule 1 to the Bill amends the Corporations Act² to improve the mechanisms available to combat the transfer of company assets that prevent, hinder or significantly delay creditors’ access to the company’s assets in a liquidation scenario, described as “creditor-defeating dispositions”.

The Bill introduces new criminal offences and civil penalty provisions for:

• company officers that fail to prevent the company from making creditor-defeating dispositions; and
• other persons (for example insolvency practitioners, lawyers and pre-insolvency advisers) that facilitate a company making a creditor defeating disposition.

Under the Bill, liquidators (or creditors) would be able to make an application to the court (or ASIC) for orders in relation to a voidable creditor defeating disposition.  Alternatively, ASIC would be empowered to make orders to recover company property disposed of, or benefits received under a voidable creditor-defeating disposition, for the benefit of a company's creditors.
Other proposed amendments include:

• preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors;
• allowing the ATO to collect estimates of anticipated GST liabilities and make directors personally liable for their company’s GST liabilities in certain circumstances; and
• authorising the ATO to retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the ATO refunds. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.³

The proposed reforms are supporting by (among other things) a proposed injection of $8.7 million to ASIC’s Assetless Administration Fund over a period of 4 years to increase the power and effectiveness of ASIC in responding to reports of corporate misconduct from external administrators under sections 438D and 533 of the Corporations Act.

Key concerns from stakeholders

The government received 37 submissions as part of the public consultation process in 2018.  A majority of the submissions were supportive of legislation that targets illegal phoenix activity. 

However, some concerns were raised by key stakeholders such as the Australian Restructuring, Insolvency, and Turnaround Association, ASIC and the Australian Institute of Company Directors in respect of:

• the introduction of a new legislative regime as opposed to strengthening the existing anti-phoenixing tools within the Corporations Act;

• the breadth of transactions that would be captured as a voidable creditor-defeating disposition; and
• the importance of finding a balance between supporting genuine restructures and deterring transactions that cross the line into illegal phoenix transactions.

Lavan comment

It is widely agreed within the insolvency industry that some level of change is required to deter would-be phoenix operators.

However, although the proposed amendments are subject to a number of safe-guards to ensure they do not affect legitimate businesses and commercial transactions, there are still some lingering concerns as to the wording of some of the proposed amendments and the Bill’s practical application.

The Bill is a positive step, but it remains to be seen whether it will adequately address the community’s concerns about illegal phoenix activity.  If and when the new anti-phoenixing laws are passed, positive steps will need to be taken by directors and practitioners alike in order to ensure those parties maintain compliance with the Corporations Act and avoid penalty.