The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 was passed by Federal Parliament in February 2020. The legislation introduces anti-phoenixing criminal offences including for those who facilitate illegal transactions and it provides a mechanism for Liquidators and ASIC to recover undervalued transfers of property.
Liquidator recovery claims for illegal phoenix transactions
The law creates a new type of voidable transaction, the creditor-defeating disposition. In general terms a Liquidator will be able to recover property via a creditor-defeating disposition claim if:
- There is a transfer or sale of property which occurred after 18 February 2020;
- The consideration paid for the property was less than the market value of the property or the best price reasonably obtainable for the property;
- The disposition had the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in a winding-up; and
- The disposition occurred 12 months before the relation back day (which is commonly the date of liquidation) or it caused the company to become insolvent.
The property which has been transferred is to be valued at the time the agreement for its disposition was entered into, or if there is no agreement, the time of the disposition. Market value is to mean the price that would be paid in a hypothetical transaction between a knowledgeable and willing, but not anxious, seller to a knowledgeable and willing, but not anxious, buyer, who transact at arm’s length.
These new laws in themselves do not grant Liquidators substantially more powers than they previously had under other voidable transaction provisions such as unreasonable director related transaction and uncommercial transaction provisions. However, with the new role of ASIC, as set out below, the provisions will make it significantly easier for a Liquidator to recover property disposed of for undervalue prior to liquidation.
What is ASIC’s role?
The new laws give ASIC powers to make orders to recover property the subject of creditor-defeating disposition. Under the new laws, ASIC may make an order:
- Directing a person to transfer property disposed of by the company back to the company;
- Requiring a person to pay an amount to the company that represents some or all of the benefits the person received because of a disposition; or
- Requiring a person to transfer property that, in ASIC’s opinion, fairly represents the application of proceeds of property that was disposed of.
ASIC may issue such an order based on an application by a Liquidator or on its own initiative.
A person may apply to the court to have an order made by ASIC set aside if the person believes the order has been wrongly made.
These provisions have the potential to streamline the recovery of property disposed of by an insolvent company for undervalue. As in the past a Liquidator has been required to make an application to Court for Orders (similar to those above), which is usually a time-consuming and costly process. This has meant that often such transfers are not recovered, as a Liquidator will not pursue them given the costs involved and often lack of funding or funds available to meet the costs.
Offences and penalties
The new laws also introduce criminal offences which apply to:
- Company officers that cause or fail to prevent a company from making creditor-defeating disposition, and
- Other persons that facilitate a company making a creditor-defeating disposition.
As with the civil provisions a creditor-defeating disposition of a company’s property will be a sale or transfer for less than the lesser of market value or the best price reasonably obtainable for the property. The new offence provisions also apply to people that facility a company transferring assets for undervalue. In the past, these types of people, often unregistered and unregulated pre-insolvency advisors have escaped punishment due to it being incredibly difficult for them to be prosecuted using existing laws.
What does this all mean?
It will now be easier for Liquidators to recover transfers of property where there has been a phoenix arrangement. However, this does not mean that all such transfers will be voidable or all phoenix arrangements will be illegal. What it does mean is that it is important to get professional advice regarding your company and the options available.
So if your company is in financial difficulty and you would like to obtain advice regarding your options, please contact our Brisbane or Gold Coast office. We will be able to advise how we can assist you in an initial obligation free consultation.