Rising from the ashes - reintroduction of the Illegal Phoenixing Bill

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 in Parliament. 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, earlier this month the Illegal Phoenixing Bill was reintroduced and can be found at the following link. 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 $2.85 billion and $5.13 billion 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 (Cth) 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 (Cth) 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 (Cth) 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 taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.[7]

What’s next?

It will become apparent on the next sitting day of Parliament whether the Illegal Phoenixing Bill will ultimately be passed. If this occurs, 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.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).