Legislation to combat illegal phoenix activity released for consultation

3 minute read  19.08.2018

In line with measures announced in the 2018 Federal Budget, the government has released a package of proposed insolvency reforms: Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018, and Insolvency Practice Rules (Corporations) Amendment (Restricting Related Creditor Voting Rights) Rules 2018 for consultation.  Consultation closes 27 September.  

In line with measures announced in the 2018 Federal Budget, the government has released a package of proposed insolvency reforms: Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018, Insolvency Practice Rules (Corporations) Amendment (Restricting Related Creditor Voting Rights) Rules 2018 and accompanying explanatory material, for consultation.  Consultation concludes on 27 September.

A high level overview of the proposed reforms is below.

The Exposure Draft: Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018 implements four measures that were announced in the 2018 Federal Budget, to combat illegal phoenix activity.

Creates new phoenix offences (with criminal and civil penalties attaching) to target those who conduct or facilitate illegal phoenixing:  Schedule 1 of the Exposure Draft Bill proposes to amend the Corporations Act 2001 (Cth) to 'improve the mechanisms available to combat illegal phoenix activity, specifically creditor-defeating dispositions: transfers of company assets that prevent, hinder or significantly delay creditors’ access to the company’s assets in liquidation'.  The amendments introduce new (civil and criminal) offences for:

  • company officers that fail to prevent the company from making creditor-defeating dispositions; and
  • other persons that facilitate a company making a creditor-defeating disposition.  Commenting on this measure, Minister for Revenue and Financial Services Kelly O'Dwyer said that it would help ensure 'pre-insolvency advisers and other facilitators of illegal phoenix activities will also be on the hook'.  
  • The offences will be supported by an extension of the existing liquidator asset clawback avenues to cover illegal phoenix transactions.
  • The draft explanatory memorandum notes that the offices are subject to a 'number of important safeguards' to ensure they do not 'affect legitimate businesses and commercial transactions'.

Recovery by ASIC: The draft Bill proposes to give the Australian Securities and Investments Commission (ASIC) specific powers to make orders to recover — for the benefit of a company’s creditors — company property disposed of or benefits received under a voidable creditor-defeating disposition.  ASIC may use these powers to recover property for a company in liquidation on its own initiative or on the application of a liquidator.  The draft explanatory memorandum states that 'This is intended to both overcome difficulties faced by liquidators where the company has insufficient funds to cover the cost of court action, and to allow ASIC to intervene where a liquidator is not fulfilling its obligations to recover company property'.

Restrictions on director resignations (to prevent them from avoiding personal liability): Schedule 2 'ensures directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors'.

Makes directors personally liable for GST liabilities: Schedule 3 allows the 'Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances'.

Extends the ATO's existing power to retain refunds where there are outstanding tax lodgements: Schedule 4 authorises 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. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund'.

Restrict the voting rights of related creditors of the phoenix company at meetings regarding the appointment or removal and replacement of a liquidator: Separately, the exposure draft: Insolvency Practice Rules (Corporations) Amendment (Restricting Related Creditor Voting Rights) Rules 2018 proposes to implement another element of the 2018 Federal Budget package, to prevent related creditors facilitating illegal phoenix activity by unduly influencing the removal or replacement of external administrators. This is implemented through amendments to the Insolvency Practice Rules (Corporations) 2016. 

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https://www.minterellison.com/articles/exposure-draft-treasury-laws-amendment-combating-illegal-phoenixing-bill-2018