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NEW ‘PHOENIXING’ OFFENCE PROPOSED

Monday, 13 November 2017

The Government has published a set of proposed changes to reduce the incidence of ‘phoenixing’ of companies to avoid paying their debts, including a proposed specific ‘phoenixing’ offence in the Companies Act.

Under the proposal directors of a ‘phoenixed’ company or the successor company itself could be sued for losses resulting from the transfer of assets of a company to avoid paying its debts.

The Treasury consultation paper is part of its inquiry into “phoenixing” – the practice of stripping and transferring assets from one company to another to avoid paying liabilities.

The paper says, “It is proposed to amend the Corporations Act 2001 (Corporations Act) to specifically prohibit the transfer of property from Company A to Company B if the main purpose of the transfer was to prevent, hinder or delay the process of that property becoming available for division among the first company’s creditors.

“This could operate in a similar manner to the provision set out in section 121(1) of the Bankruptcy Act 1966, which states that the main purpose in making the transfer will be taken to be the prescribed purpose, "if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent".

“Rebuttable presumptions of insolvency would apply, and such a transaction would be void against a liquidator (so that the assets can be clawed back in liquidation).

“The offence would give rise to a right in creditors and liquidators (and ASIC) to sue for compensation for the loss caused by the conduct of those who engage in the prescribed conduct as well as those who are knowingly involved in that conduct under section 79 of the Corporations Act.’

In a foreword to the paper, the Minister for Revenue and Financial Services, Kelly O’Dwyer, says phoenixing hurts all Australians, including employees, creditors, competing businesses and taxpayers, and has been a problem for successive governments over many decades.

“Phoenixing has a significant financial impact,” she says. “In 2012, the Fair Work Ombudsman and consultants PwC estimated the cost of phoenixing to the Australian economy to be as high as $3.2 billion annually.

“It also undermines confidence in the corporate and insolvency sectors and the broader economy.

She said, “Phoenixing behaviour is becoming increasingly sophisticated and difficult to detect and deter within the existing legal and regulatory framework.

“To address this, the Government is consulting on options for implementing a range of measures to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers.

“These are based on the recommendations of the Government’s Phoenix Taskforce. “The Government recognises the need for carefully targeted reforms which minimise any impact on legitimate business activities and honest business restructuring.

“These reforms will complement other Government action we have already taken, including:
• instituting the Phoenix, Black Economy and Serious Financial Crime Taskforces;
• strengthening disciplinary rules for insolvency practitioners;
• legislating to improve information sharing between key regulatory agencies;
• reviewing and enhancing ASIC’s powers and enforcement tools;
• consulting on law reform initiatives to curb the excessive drain on the taxpayer funded Fair

Entitlement Guarantee scheme, which covers employees’ entitlements left outstanding as a result of failed business enterprises;
• improving the collection of GST on new residential premises and residential subdivision transactions from 1 July 2018;
• phasing in near real-time reporting by employers of payroll and superannuation information to the ATO through the single touch payroll reporting framework, giving the ATO improved visibility over employers’ compliance with their tax obligations including the superannuation guarantee;
• consulting on a register of beneficial ownership for companies, to be made available to key regulators for enforcement purposes; and
• developing and improving legislation to encourage and protect whistleblowers.

“As part of its anti-phoenixing agenda, the Government is engaging with key stakeholders on the introduction of a Director Identification Number (DIN). A DIN will allow enforcement agencies to verify and track the current and historical relationships between directors and the entities they are associated with.”

She said the Government was seeking views on the options for law reform outlined in the consultation paper. The period for comment ends 27 October.

 

Further information

Treasury consultation: Reforms to address illegal phoenix activity

Ministerial media release: Consultation on reforms to address illegal phoenixing

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