Consultation on illegal phoenix activity

Treasury has published a Consultation Paper on proposed reforms to the tax and corporations law to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers. Background.

Phoenixing involves the stripping and transfer of assets from one company to another to avoid paying liabilities.

The aim of the reforms is to remove the unfair competitive advantage that flows from illegal phoenix activity, while minimising any unintended impacts on legitimate businesses and honest restructuring.

The proposals include:

A specific phoenix offence

It is proposed to amend the Corporations Act 2001 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.

It is proposed that where ASIC (or a liquidator) suspects that illegal phoenix activity has occurred and that assets of Company A have been transferred to Company B for no or less than their market value:
• ASIC may issue a notice upon Company B (either on ASIC’s behalf or at the request of a liquidator who is able to satisfy ASIC as to the matters above) requiring that Company B deliver up property or monies’ worth, along the lines of the regime in place under section 139ZQ of the Bankruptcy Act; and
• the recipient of the notice would have the right to apply to court to set aside the notice.

Limiting backdating of director appointments and resignations

This proposal would involve amending the Corporations Act to impose a rebuttable presumption that where a change in director notice is lodged more than 28 days (or another suitable period) after the date of the director’s resignation, the director could still be held liable for misconduct that had occurred up to the point of lodgement.

The presumption could be overturned on application to the court or at the provision of appropriate information to the satisfaction of ASIC.

Additionally, the onus for reporting director resignations could be shifted from the company to the individual resigning director.

This would ensure that the responsibility attaches to the resigning director so the director can’t abrogate this to the company, which may be nothing more than an empty corporate shell.

Sole director’s resignation

The Government intends to limit a sole director’s ability to resign from office without either first finding a replacement director or winding up the company’s affairs by amending the Corporations Act to deem such a resignation ineffective.

In circumstances where a company has more than one director who simultaneously (or nearly simultaneously) resign and abandon a company, similar restrictions would apply.

Alternatively, abandoning a company in this manner could be made an offence.

The rights of related creditors to vote

The Government is considering legislative reform to restrict the rights of related creditors to vote at creditors’ meetings.

The aim is to minimise the risk that related creditors, with or without the assistance of the external administrator, can frustrate unrelated creditors – particularly where a resolution is proposed to remove and replace the external administrator.

Under this proposed measure the external administrator will be required to disregard “related creditor” votes received in relation to a resolution remove and replace an external administrator.

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