On 4 July 2019, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth) was reintroduced to Parliament.
The Bill proposes to bolster the powers of liquidators and the regulator to combat, deter and disrupt the core behaviours of phoenix operators.
What is illegal phoenix activity?
It is difficult to form a concise definition because the line between legitimate corporate turnaround and illegal phoenix activity can be blurred. Here, ‘illegal phoenix activity’ means the deliberate and systematic liquidation of a corporate trading entity with an intention to avoid liabilities in order to continue the operation and profit-taking of the business through other trading entities.
In mid-2018, PricewaterhouseCoopers found that the total direct cost to Australian business, employees and government was between $2.85 billion to $5.13 billion in 2015-2016 - a 75 per cent rise from the previous four years. ASIC Commissioner John Price has, however, noted that the current laws make it difficult to pursue directors who have liquidated a company and then created ‘phoenix’ entities to avoid paying debts, meaning that there is a need for harsher regulations and penalties in response to corporate misconduct.
The amended Bill marks the most recent addition to a number of key measures and responses that have been implemented to deter illegal phoenix activity.
The Anti-Phoenixing Bill
The Explanatory Memorandum to the Bill expressly reiterates the Australian Government’s commitment to ongoing reform of Australia’s corporate insolvency regime, noting that the Bill will be targeted at countering illegal phoenix activity, marking the Government’s third tranche of insolvency law reforms.
The main change to the current legislation, if enacted, would result in harsher civil and criminal penalties for company directors who avoid paying employee entitlements during insolvencies or restructures, where the fault element will be lowered to recklessness, rather than intention.
It is anticipated that the Bill will pass through both houses without issue. Once enacted the Bill will implement four key measures to combat illegal phoenix activity:
- Schedule 1 will enable liquidators and ASIC to recover company property that is the subject of “creditor-defeating dispositions” i.e. where the intent is to cheat creditors of the benefit of such property in liquidation, and further penalise (by way of criminal charges, civil penalties and compensation orders) those who engage in or facilitate those dispositions;
- Regulating, and holding accountable directors under Schedule 2 for misconduct, where directors will be banned from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors at any point in time;
- As an addition to the Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Cth) which came into effect on 1 July 2018, Schedule 3 will enable the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s outstanding GST liabilities in certain circumstances; and
- Operating in conjunction with Schedule 3, Schedule 4 will authorise the Commissioner to retain tax refunds due to taxpayers who have outstanding lodgements or are required to provide other information that may affect the amount the Commissioner refunds. This ensures taxpayers satisfy their tax obligations and pay any outstanding tax prior to being entitled to a tax refund.
Further, the new laws will enable ASIC to disqualify company directors and officers who hold a record of recurring corporate breaches and insolvencies and who repetitively rely on the Fair Entitlements Guarantee to fulfil certain obligations to their employees.
The Bill is undoubtedly a move in a positive direction in terms of addressing community concerns about illegal phoenix activity, and it provides for a clearer basis for liquidators to pursue claims against company officers and their advisors.
Whether the Bill goes far enough to achieve its aims, however, is open to debate. In particular, the Bill extends the “safe harbour” provisions as a defence to potential claims brought solely on the basis of “creditor-defeating dispositions”. The Bill also does not address a core issue in corporate insolvency – the cost of recovery actions. As Andrew Fielding, the national lead for BDO’s business restructuring team has noted, liquidators often see potential phoenix activity, but don’t have the funding to follow it up. Mr Fielding has raised the concern that despite the harsher legislation, the issue of funding for liquidation for investigation remains, stating, “it still comes down to someone having to investigate and prove the phoenix…who is going to fund the liquidator to come up with the proof? The frustration here is being a liquidator and not being able to do the investigation.”
The Bill is currently before the House of Representatives. If you would like to review the Bill in its proposed form, please see the following link. If you would like to track the Bill’s progress through Parliament, please see the link to the APH website, where you can subscribe to receive updates on its progress.
This article originally appeared on LinkedIn