To combat illegal phoenixing activity, ASIC has been granted increased powers which give the regulator the ability to make orders setting aside a creditor-defeating disposition by a company being wound up (without the involvement of the Court).
The provisions were introduced into the Corporations Act 2001 (Act)1 to give liquidators another avenue to pursue assets.
What is a creditor-defeating disposition?
A disposition of property of a company is a ‘creditor-defeating disposition’ if the two conditions set out in the Act are satisfied2.
Put simply, a disposition of property of a company may be a creditor-defeating disposition if:
- the consideration payable to the company for the disposition be less than the lower of the market value of the property and the best price reasonably obtainable for it, at the time of the disposition or at the time of any earlier relevant agreement for the disposition; and
- it prevents, hinders or significantly delays the property from becoming available for the benefit of creditors in the winding-up.
A creditor-defeating disposition can extend to a disposition that results in another person becoming the owner of property that did not previously exist (for example, the issuance of shares) or where a company makes a disposition to another person and that person gives some or all of the consideration for the disposition to another party (ie not the company)3.
ASIC’s new administrative powers
Under the changes, ASIC can make one or more of the following orders on its own initiative or at the request of a liquidator4:
- An order directing a person to transfer to the company the property that was the subject of the disposition.
- An order requiring payment to the company of an amount that, in ASIC’s opinion, fairly represents some or all of the benefits that the person has received (directly or indirectly) because of the disposition.
- An order requiring a person to transfer to the company property that, in ASIC’s opinion, fairly represents the application of proceeds of property that was the subject of the disposition.
In effect, the new powers granted by ASIC gives a liquidator the ability to pursue a creditor-defeating disposition without incurring the time and cost of a lengthy court proceeding. It also enables liquidators to pursue a creditor-defeating disposition where they may otherwise not pursue such a claim because they are without funds. Time limits apply in relation to a liquidator’s ability to request that ASIC make such an order5.
What factors will ASIC consider?
In deciding whether to make an order, ASIC must have regard for the following6:
- the conduct of the company and its officers;
- the conduct of the person;
- the circumstances, nature and terms of the disposition;
- the relationship (if any) between the company and the person; and
- any other matter ASIC considers relevant.
ASIC has helpfully provided some guidance7 as to the other matters that ASIC considers relevant. Whilst each matter will depend on the circumstances of the particular case, ASIC has identified the following matters by way of example (not exhaustive):
- the circumstances that led to the disposal of the asset;
- whether the person and the property are readily traceable and identifiable;
- the conduct of officers of a company, including whether that conduct indicates any suspected or alleged contraventions of the Corporations Act in relation to the disposition;
- the expected level of public benefit from an order, such as the prospects of a return to creditors and the likely availability of a nominated person to comply with any order to pay money or deliver up property;
- the likelihood that an order will lead to a change in the person’s conduct or that the business community is generally deterred from similar conduct; and
- mitigating factors relevant to the person who is suspected of making the disposition.
When must ASIC not make an order?
ASIC cannot make an order where if it has reason to believe that, if it were a court, section 588FG of the Act would prevent it from making a corresponding order under section 588FF8 or when the disposition was entered into or done9:
- before 18 February 2020;
- as part of a safe harbour restructure;
- under a compromise or arrangement approved by a court10;
- under a deed of company arrangement or by an administrator of the company;
- by a restructuring practitioner for the company or under a restructuring plan made by the company, or
- by a liquidator or provisional liquidator.
Will ASIC provide an affected person an opportunity to respond to the allegations?
Because ASIC’s decision is an ‘administrative’ decision, ASIC must afford ‘procedural fairness’ to a person directly or materially adversely affected by a decision to make an order. ASIC has indicated that in such circumstances, it will:
- give the affected person an opportunity to be heard; and
- generally, give access to the documents that ASIC will rely on when making its decision, including, if applicable, a copy of the liquidator’s application and supporting documentation11.
ASIC will give access to affected parties on the condition that the information only be used for the purposes of preparation of submissions, or any hearing regarding their decision. ASIC may also give access to a third party and impose conditions on the third party.
Will an affected person be notified of an order made by ASIC?
If ASIC makes an order in relation to a creditor defeating disposition, it must include written reasons for the making of the order including why ASIC is satisfied section 588FGAA of the Act applies12. A copy of the order will also be given to the company’s liquidator.
Where an order is made requiring a person to pay a company an amount, ASIC may require the amount to be paid at a time or within a period set out in the order. Any order made by ASIC is recoverable by the company in liquidation as a debt by action against that person in a court in the usual course.
What are my options if an order is made by ASIC?
If ASIC makes an order against you, you can, among other things:
- comply with the order – subject to its terms, this may involve transferring the property back to the company13 or paying the amount of the order; or
- apply to the Supreme Court to have the order set aside – note that such application must be filed within 60 days after the day on which you are given the order or otherwise became aware of it14.
Failure to comply with an administrative order is an offence and may be subject to a penalty of a fine or imprisonment, or both.
Seek legal advice immediately if you receive a notice or order in relation to an alleged creditor-defeating disposition
If you receive a notice or order from ASIC, you should contact your lawyer immediately so that you can get appropriate advice and work out a strategy to:
- respond to the allegations before the expiration of any timeframe nominated by ASIC for a response; or
- if appropriate, apply to the Court to have the order set aside, before the expiration of the 60 days from the receipt of the order.
This article was written by Simone Farrugia, Special Counsel and reviewed by Jonathan Kramersh, Partner.
1Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth) came into effect on 18 February 2020
2Section 588FDB(1)(a) and (b)
3Section 588FDB(2) and (3)
7Information Sheet 261 (INFO 261) (https://asic.gov.au/for-finance-professionals/registered-liquidators/your-ongoing-obligations-as-a-registered-liquidator/asic-orders-about-creditor-defeating-dispositions/)
9Op cit 7