Insights + Resources

April 17, 2019

Illegal phoenix activity targeted by new corporate law reforms

Illegal phoenix activity costs the Australian economy billions of dollars annually. A suite of new reforms currently before Parliament seeks to give the Phoenix Taskforce more power to prevent illegal phoenixing, but it remains to be seen what exact form these will take. 

What is illegal phoenix activity?

Illegal “phoenixing” typically occurs when controllers strip a company of its assets, transfer them to a newly registered company, then liquidate the predecessor company. Though such restructuring may be legitimate conduct when done in good faith, it is often done in order to avoid legal liability for debts to creditors.

A report released by the ATO in July 2018 estimated illegal phoenix activity costs the Australian economy up to $5.13 billion per year in unpaid debt to trade creditors, unpaid employee entitlements and unpaid taxes.

History of Targeting Illegal Phoenixing

The government is actively targeting illegal phoenixing. In 2014, it established the Phoenix Taskforce, which comprised the Australian Tax Office (‘ATO’), the Australian Securities and Investment Commission (‘ASIC’) and the Fair Work Ombudsman. In August 2018 Kelly O’Dwyer Minister for Revenue and Financial Services, released proposals for changes to the Corporations Act 2001 (Cth) (‘Corporations Act’) seeking to address illegal phoenixing of corporations. Most recently, two individuals were sentenced to 6 years and 5 years in jail respectively for tax fraud associated with illegal phoenix activity.

As of 14 February 2019, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth) (‘Bill’) has been introduced to the Federal parliament in an attempt to further empower government agencies to crack down on phoenixing.

Changes under the Bill

The Bill seeks to amends Division 3 of Part 5.7B of the Corporations Act (Recovering property or compensation for the benefit of creditors of insolvent company). In its current state, it focuses on tackling creditor-defeating dispositions by company directors. The Bill proposes two primary changes to Division 3, as set out below.

  • Under proposed s 588GAB of the Act, a duty will be created for officers to not engage in, or procure, creditor-defeating dispositions. Contravention of this duty will be a criminal offence and, if the person is an individual, will attract penalties of up to 10 years imprisonment or a fine, the amount of which is the greater of $945,000 or 3 times the benefit obtained. If the person is a company, contravention will attract a fine, the amount of which is the greater of $9,450,000, 3 times the benefit obtained, or 10% of the company’s annual turnover.
  • Under proposed s 588FGAA of the Act, ASIC will be empowered to make orders undoing the effect of a creditor-defeating disposition. This is different to current remedies available for other duties breached under the Corporations Act. This new power includes orders directing persons to transfer property back to the predecessor company or, if the property has been disposed, an amount of money that fairly represents the benefit gained from the phoenix activity. Failure to comply with these ASIC orders constitutes a criminal offence as per s 1311.

Concluding remarks

The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 forms part of a tranche of reforms to corporate insolvency law over the past year, including changes to the enforceability of ipso facto clauses and safe harbour reforms. Regardless of the Bill’s final form, corporations in Australia can expect tougher laws on restructuring and illegal phoenixing after the Federal election.

In the lead up to the recently announced 2019 Federal election, the Bill has the potential to become politicised, with Labor having indicated that it would consider “naming and shaming” directors engaged in illegal phoenix activity. It remains to be seen if any further changes to the Bill will be debated in the Houses.

The information above is general in nature. If you want specific advice about how Australia’s corporate insolvency regime may impact you, please contact us below.

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