The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was reintroduced into Federal Parliament on 4 July 2019, after lapsing at the last election. This Bill is another example of using a sledgehammer to crush a walnut, and worse, the Bill (if enacted) will pose serious risks for companies seeking to restructure in good faith and their advisors.
This Bill has had several rounds of public consultation through Treasury going back to 2018. The purpose of the Bill is clearly to catch restructuring efforts that seek to shift company assets out of the reach of creditors and potential liquidators who might use the assets to pay creditors and/or to sue the company managers and directors involved in the company’s collapse. The goal of the Bill is not the problem. Clearly discouraging phoenix company activity that tries to defraud creditors is a sound policy goal. The problem with the Bill is the way that it tries to achieve this is likely to catch lots of legitimate restructuring efforts undertaken in good faith and for legitimate reasons. While the line between improper phoenix activity and appropriate restructuring is sometimes a difficult one to draw, this proposed law sets up Draconian penalties that will likely have a chilling effect on a range of genuine and appropriate restructuring efforts.
Main features of the Bill
The Bill creates a new concept: “creditor defeating disposition”. This is defined in a new s 588FDB, and is based on a disposal of the company’s property for less than the lesser of:
- market value; or
- the best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time.
The disposal must also have the effect of:
- preventing the property from becoming available for the benefit of the company’s creditors in the winding-up of the company; or
- hindering, or significantly delaying, the process of making the property available for the benefit of the company’s creditors in the winding-up of the company.
Where this applies, a range of consequences can follow:
1. a new voidable transaction is created for creditor defeating disposition under s 588FE(6B) where the company was insolvent at the time (or became insolvent because of the transaction) or where the company entered external administration within 12 months of the transaction.
There will be a defence if the safe harbour (in s 588GA) applies: see proposed s588FG(8).
2. ASIC will be given new powers to issue the equivalent of a s 139ZQ notice (which applies to the Official Receiver in Bankruptcy in respect of recovery proceedings in bankruptcy).
This new power (in s 588FGAA) will allow ASIC, on its own initiative or on an application by a liquidator, to issue a notice to a person who has received property through a creditor defeating disposition. The notice can require the value of the property disposed of be paid to the company; the proceeds of the property be paid to the company and/or the value of the benefit obtained (directly or indirectly) through the disposal to be paid to the company. A failure to comply is a criminal offence: s 588FGAC. ASIC’s order can be set aside by the court under proposed s 588GAE.
ASIC can’t make an order if it believes that the court would not make an order with respect to the voidable transaction for creditor defeating disposition, and so if the safe harbour applies (which is a defence to the voidable transaction provision under proposed s 588FG(8)) then ASIC can’t make an order. So ASIC get’s to decide, on its own initiative, whether the disposal transaction would fall within safe harbour, and if doesn’t doesn’t believe that it does, and ASIC believes you didn’t pay market value, then ASIC can force you to make payments to the company in liquidation. This is surely overreaching for any government agency. Giving you the right to overturn ASIC’s order in court is cold comfort indeed.
So you can take part in a corporate restructure and if the disposal of the asset by the company is less than market value (or less than what ASIC says is market value, or what ASIC says could have been obtained in the circumstances), then ASIC can issue a notice on you, without any court findings against you, and require you to pay whatever ASIC believes is fair value for what you have benefitted out of the transaction, not limited to the value of the property received. If you don’t comply you’ll need to challenge ASIC’s notice in court or you’ll be guilty of a criminal offence. So effectively ASIC now gets to decide what assets are worth in corporate restructuring transactions involving insolvent companies or companies that end up in external administration…this is nuts!
3. New criminal (s 588FGAB(1)) and civil liability provisions (s588FGAB(2)) will be created for company officers who engage in conduct that results in the company making a creditor-defeating disposition of property of the company where the company:
- is insolvent, or becomes insolvent because of the transaction;
- enters external administration within 12 months of the transaction; or
- ceases to carry on a business within 12 months as a direct or indirect result of the transaction.
There is no knowledge requirement for the criminal liability provision, although there is a knowledge requirement for the civil liability provision (the officer must know, or a reasonable officer would know, that the disposal is a creditor defeating disposition).
There is also a new criminal and civil liability provision for those who procure companies to enter into creditor defeating dispositions (s 588FGAC).
Conduct that satisfies the safe harbour will be a defence against the personal liability provisions (ss 588FGAB, 588FGAC). While this is an appropriate defence, the safe harbour is a complex piece of legislation with several qualifications and ambiguities. It’s a brave lawyer who will give unqualified legal advice that a particular restructure will definitely satisfy the safe harbour requirements, particularly when we’ve had no case law and no regulatory guidance on it.
The Combatting Illegal Phoenixing Bill is overkill. While undervalued transactions are a problem with phoenix activity, they can already be dealt with using existing legal powers (such as directors’ duties which include accessorial liability, and existing voidable transaction provisions). The problem of phoenixing is not caused by a lack of law, it’s caused in large part by a lack of effective enforcement by ASIC and other regulators. Rather than asking parliament for more power, try showing the community that you can effectively use the power you’ve had for years. Let’s see:
- more ss 206E and F bannings for company directors;
- more action on the thousands of insolvent trading and breach of directors’ duties allegations that liquidators report to ASIC each year;
- the Assetless Administration Fund actually used to assist liquidators in assetless administrations, and not merely those matters that are open and shut cases with ample evidence.
With more effective enforcement we could address problematic phoenixing, but the Combatting Illegal Phoenixing Bill is just more layers of regulation, and (worse) will likely stifle some genuine and good faith restructuring efforts because of the new substantial legal risks involved. ASIC has not shown itself to be a particularly effective phoenix policeman, and I’m not confident that the massive expansion of power and discretions proposed to be given to ASIC in this Bill will deliver any tangible benefit.