Contributed by Pravin Aathreya, Partner, and Saskia van Loon, Associate, Johnson Winter & Slattery
Australia’s insolvency laws are changing, yet again.
The Treasury Law Amendment (Combating Illegal Phoenixing) Bill 2019 (the Illegal Phoenixing Bill) was first introduced in February 2019 but lapsed with the dissolution of Parliament before the Federal election. At that time, it was thought that the Bill would be delayed until after the 2019 Federal election.
With the Federal election now behind us, the Illegal Phoenixing Bill was reintroduced on 4 July 2019. Appearing to replicate the former Bill, the current Illegal Phoenixing Bill seeks to combat illegal phoenix activity and reduce the harmful effects of phoenixing on the Australian economy, of which direct costs to Australian businesses, employees and the government have been estimated to be between $2.85b and $5.13b in previous years.1
What is “phoenixing”?
“Phoenixing” or “phoenix activity” (or analogous terms) is not defined in Australian legislation.
But like the mythological bird, phoenix activity refers to a distressed company that is deliberately wound up to avoid repaying its creditors (including employees) while a new company essentially “rises from the ashes” being established to perform and operate the same business as that of the company which was wound up (without any of those pre-existing liabilities).
Increased regulation of improper phoenix activity — proposed amendments
With illegal phoenix activity continuing to pose a significant issue for the Australian economy, the Illegal Phoenixing Bill aims to combat the practice with the following proposed provisions.
New voidable transaction and duty to prevent creditor-defeating dispositions
A new voidable transaction provision is proposed with the introduction of a new section 588FDB of the Corporations Act 2001 aimed at addressing improper phoenix activity. The Explanatory Memorandum to the Illegal Phoenixing Bill explains that a “creditor-defeating disposition” will apply to a disposition of company property that:
- “is less than its market value (or the best price reasonably obtainable); and
- has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up.”2
New phoenixing offences are also proposed with the introduction of new sections 588GAB and 588GAC into the Corporations Act which give rise to civil and criminal liability for officers and advisors involved in creditor-defeating dispositions of company property.
Limitations on director resignations
New provisions are proposed to deter the improper backdating of resignations or the resignation of a director when such a resignation would leave the company with no directors.
ASIC’s new recovery power
A new administrative recovery power for ASIC is proposed with the introduction of a new section 588FGAA of the Corporations Act. If enacted, the proposed provision will broaden ASIC’s powers by allowing ASIC to order a person to:
- return to the company for distribution among creditors property that was transferred subsequent to the initial creditor-defeating disposition
- pay an amount equal to the benefit the person received from the creditor-defeating disposition, or
- transfer property that was purchased with the proceeds of sale of a creditor-defeating disposition (or similar dealings).3
However, the proposed new law will ensure that “ASIC may not make an administrative order if the safe harbour would apply to the disposition or the initial disposition was for market value, or against a good faith purchaser in certain circumstances.”4
Changes to GST liability
Proposed amendments to the Taxation Administration Act 1953 will allow the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances.5
Changes to retention of tax refunds
Proposed amendments to the Taxation Administration Act 1953 will authorise the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the Commissioner refunds.6 The purpose of this proposed amendment is to ensure that taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.7
If the Bill is ultimately passed, we expect the new provisions to provide a significant new weapon in the arsenal of ASIC and liquidators in combating the scourge of illegal phoenix activity.
|1Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 5 at [1.4].|
2Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 15 at [2.12].
3Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 23 at [2.55].
4Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 24 at [2.56].
5Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 45 at [4.1].
6Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 59 at [5.1].
7Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Explanatory Memorandum, page 4.
[This article was originally published in CCH Tax Week on 2 August 2019. Tax Week is included in various tax subscription services such as The Australian Federal Tax Reporter and CCH iKnow. CCH Tax Week is available for subscription in its own right. This article is an example of many practitioner articles published in Tax Week.]