The term ‘phoenix activity’ is used to refer to both legitimate business rescue attempts and the use of insolvency processes to avoid the payment of creditors. In an attempt to combat damaging phoenix activity, which is estimated to cost the Australian economy up to $5.13 billion each year, in February the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 came into force. It is vital that directors, other company officers and relevant advisors are up to date with the new provisions to avoid potentially costly contraventions when restructuring a business. Lauren Crosby considers the new legislation, which is intended to protect creditors, rather than stifle legitimate entrepreneurial activities.
Phoenixing in a nutshell
Phoenixing generally occurs when the assets of one company are stripped and transferred to another entity. This tends to occur when a business is in trouble and looking for a way to transfer their operation to a new entity and avoid obligations to creditors of the old entity. The transferring of assets from one entity to another may also be done as part of a legitimate restructure or business sale transaction.
Typically, phoenix activity will be illegal when all assets are transferred out of one entity but all liabilities remain with the original company. Without any assets, creditors, including employees and suppliers, remain unpaid and the new entity begins trading while the original company is wound up.
What are the new provisions?
At the core of the provisions is the creation of a new category of voidable transaction – the ‘creditor-defeating disposition’ (section 588FDB of the Corporations Act (Cth) 2001). A creditor-defeating disposition occurs when:
- a company transfers assets for less than market value or less than the best price reasonably obtainable; and
- the transaction impacts the availability of the company’s property to benefit creditors in a winding up; and
- the transaction occurs when either (1) the company is insolvent or (2) because of the transaction the company becomes insolvent; or (3) the company is wound up within 12 months of the transaction occurring and the transaction contributed, either directly or indirectly to the company entering liquidation.
The new amendments create:
- limits on conduct;
- penalties, both civil and criminal, for those who engage in the ‘creditor-defeating dispositions’; and
- powers for liquidators and ASIC to recover dispositioned assets and seek compensation from officers and others, including advisors involved in the disposition.
Importantly, the new offences are the subject of several safeguards to ensure that legitimate business transactions are not affected. These safeguards include:
- the maintenance of the safe harbour provisions so that a transaction is not voidable if it is made as part of a course of action that satisfies the safe harbour requirements.
- limiting the period of transactions to within 12 months of the relation backdate.
- Protection for a purchaser for value in good faith without knowledge of the company’s insolvency.
- Price to be paid in a hypothetical transaction between a knowledgeable and willing, but not anxious, seller to a knowledgeable and willing, but not anxious, buyer transacting at arm’s length
- Established by valuation or similar
Best price reasonably obtainable
- To be considered when a company may need to realise an asset at less than market value
- Legitimate urgency in the sale
- Consideration of whether the process of the sale was reasonable in the circumstances
How will this affect you?
If you are an officer of a company or an advisor you should be aware of these new laws and the impact they may have on you and those you are advising. Officers and directors in particular need to be abreast of the amendments, as they can be held personally liable for breaches, risking serious civil and criminal penalties.
It is important when considering a restructure or simply the sale of any assets, particularly involving the transfer of property to related-parties, to ensure that:
- Asset are sold for not less than market value;
- if there is no market value or it is unable to be obtained, the best price reasonably obtainable is paid, having regarding to the circumstances which is likely to include running an appropriate sale process (we would suggest that advice be obtained from a suitable qualified professional regarding the best sale process to achieve the best price);
- the value is supported by a formal valuation by an appropriately qualified professional and records of the valuation are retained;
- the transaction is adequately documented to avoid the availability of the presumption that the transaction was not for market value if appropriate records are not kept;
- the transaction does not occur while the company is insolvent or doesn’t cause the company to become insolvent; and
- adequate evidence of the transaction is retained.
As always, to limit potential personal liability, directors and officers should also:
- keep themselves informed of the company’s financial position;
- promptly investigate any financial difficulties;
- obtain advice from an appropriately qualified professional; and
- act in a timely manner.
If you are a director of a company or an advisor, considering a restructure or sale it is important to seek legal advice. Please contact Lauren Crosby for advice regarding the new anti-phoenixing laws or Gerry Cawson or Michael Garry for assistance generally in relation to restructuring and sales.
 Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 – Explanatory Memorandum