The Order of the Phoenix

18 October 2019

Further corporate insolvency reform is on the horizon. With the Insolvency Law Reform Act 2016 and the safe harbour and ipso facto provisions already firmly under its belt, the Australian Government has ‘phoenixing’ back on its agenda.

Initially part of a package of reforms announced on 11 October 2017 by the Turnbull Government, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Bill) was re-introduced into Parliament on 4 July 2019, following the re-election of the present government. The schedule of the Bill amends the Corporations Act 2001 (Cth) (Act) by introducing new:

  1. Phoenixing or “creditor-defeating deposition“;
  2. Sanctions for those who engage in or facilitate illegal phoenixing; and
  3. Powers of recovery of property for liquidators and ASIC.

The Bill is currently before the House of Representatives.

What is phoenixing?

Phoenixing typically involves the divesting and transfer of assets from a distressed company to another company for the purpose of defeating the distressed company’s creditors. Asset-less, the distressed company ceases to trade and is wound up, leaving little (or nothing) for the creditors. The new company, and phoenix, is reborn from the ashes of the distressed company and continues trading the former business.

What does the Bill seek to do?

At the crux of the Bill is the ‘creditor-defeating disposition’ (CDD) or disposition of company property for less than its market value (or the best price reasonably obtainable) that prevents, hinders or significantly delays the property becoming available to creditors in a liquidation. Dispositions can include rights and other interests in property created by the company in favour of another entity and consideration paid to a third party. The CDD is also based on the “effect” and “results” of the transaction rather than necessarily any intention.

Such dispositions may be voidable and recoverable by a liquidator (and their disposer liable to sanction) if made when the company is insolvent or, because of the disposition, the company immediately becomes insolvent, enters external administration or ceases to carry on business altogether within the following 12 months.

Exceptions

A disposition will not be voidable if made, amongst things:

  • Under a deed of company arrangement or scheme of arrangement;
  • By the company‚Äôs administrator or liquidator acting bona fide;
  • For market value; or
  • For legitimate restructuring purposes pursuant to safe harbour (as it is proposed that the duty to prevent a CDD as well as the duty to prevent insolvent trading is not to apply if the safe harbour elements are made out).

Who will be liable?

  • Directors or an officer of the company; and
  • Any person who procures, incites, induces or encourages a company to make a probhibted CDD. This is likely to include pre-insolvency advisers, accountants, lawyers and other business advisers.

Benefits of the Bill for liquidators

  • Liquidators (and creditors where appropriate) may apply to a court or ASIC for recovery against a company officer (or external party) in respect of a CDD. This is likely to assist liquidators who are unfunded or who have insufficient funds to pursue litigation. It will also enable ASIC to intervene in the unfortunate circumstances where a liquidator is not acting in an expeditious manner; and
  • As mentioned above, the Bill will focus on the “effect” and “results” of the transaction, not the intention of the parties, thereby making CDD claims potentially and theoretically easier to prove (in turn, reducing costs and uncertainty further).

Conclusion

When enacted, the Bill will be another effective tool for liquidators (and creditors where appropriate) to recover company property from company officers and facilitators for the benefit of creditors. Such amendments will need to be considred by all advisors (including pre-insolvency advisers, insolvency practitioners, their lawyers and accountants).

This article was written by Millie Garvin, Senior Associate in our Sydney office.

Publication Editor: Grant Whatley

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