Combating Illegal Phoenixing

The Government’s new Bill

The Federal Government has recently issued its Exposure Draft of the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018, which was open for comment until 27 September 2018.

This proposed Bill is part of the Government’s ongoing reform of Australia’s corporate insolvency regime and is the Government’s third tranche of insolvency law reforms.

The first tranche was the Insolvency Law Reform Act 2016, the stated purpose of which was to modernise the corporate reorganisation framework around the registration, remuneration and regulation of insolvency practitioners. The second tranche, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017, introduced the safe harbour provisions for directors, and the ipso facto clauses restriction.

Phoenix activity, not defined in legislation, can encompass both legitimate business rescue activities and the illegitimate opportunistic or systemic stripping and transferring of assets out of a company.

The Government has long been concerned with and inquiring into the nature and consequences of illegal phoenix activities, and undertook extensive public consultation in 2017. In the 2018/19 Budget the Government announced a package of reforms to the corporations and tax laws to combat illegal phoenix activity. The proposed Bill is the next step.

The exposure draft legislation includes reforms to:

  • Introduce new phoenix offences that target those who conduct and those who facilitate illegal phoenix transactions (which introduces the concept of Creditor–defeating Dispositions).
  • Prevent directors from backdating their resignations to avoid personal liability.
  • Prevent a sole director from resigning and leaving a company as an empty corporate shell with no director.
  • Extend the director penalty provisions to make directors personally liable for their company’s GST liabilities.
  • Expand the ATO’s existing power to retain refunds where there are tax lodgements outstanding.
  • Restrict the voting rights of related creditors of the phoenix operator at meetings regarding the appointment or removal and replacement of an external administrator.

Clearly the objective of the proposed legislation is to tackle the damage or cost to those affected by illegal phoenix activity: legitimate businesses, employees, contractors and the Government (in particular, the ATO). It appears to many that one of the main drivers for this keen interest and action now by the Government is the pressure on the Government to minimise the loss of tax revenue.

Footnote

Arguably there were already adequate measures available to tackle phoenix operators, and their advisors. Has part of the problem in the past been a lack of resources and resolve?

I refer to ASIC’s Annual Reports for 2015/16 and 2016/17.

 19 October 2018