Anti-phoenix measures open for consultation

On 16 August the government released draft legislation intended to implement the anti-phoenix measures that were announced on budget night.

The legislation does not include the widely supported idea of a Directors Identification Number – but that is as expected, the DIN was the subject of an earlier consultation process which ended on 16 August.

The draft legislation does not go beyond the measures announced on budget night so in that sense there are no surprises. but there are some noteworthy aspects of the implementation of those headline measures.

A new type of voidable transaction

The legislation will create a new type of voidable transaction, a ‘Creditor Defeating Disposition’ (‘CDD’), defined as a transaction which has the effect of:

(a) preventing the property from becoming available for the benefit of the company’s creditors in the winding‑up of the company; or

(b) hindering, or significantly delaying, the process of making the property available for the benefit of the company’s creditors in the winding‑up of the company.

which will be potentially voidable if one of the following applies:

(i) the transaction was entered into, or an act was done for the purposes of giving effect to it, when the company was insolvent;

(ii) the company became insolvent because of the transaction or an act done for the purposes of giving effect to the transaction;

(iii) less than 12 months after the transaction or an act done for the purposes of giving effect to the transaction, the start of an external administration (as defined in Schedule 2) of the company occurs as a direct or indirect result of the transaction or act;

The absence of any requirement to prove insolvency in relation to transactions entered into in the twelve months before formal insolvency may assist liquidators – although they may still need to disprove solvency if the other party claims the good faith defence.

Administrative Recovery process

The proposed amendments will create a regime by which a liquidator can ask ASIC to make administrative orders to recovery property that was transferred as a result of a CDD.

Liquidators will welcome a recovery regime which has the potential to avoid the costs and delays of Court processes, but there is little detail here about what ASIC’s own processes will be.  For example, the legislation does not seem to require ASIC to allow the other party a ‘hearing’ – but ASIC may form the view that it should.

Also worth noting is that a failure to comply with such an administrative order will expose a party to the civil penalties and offence regimes, which should assist with a more cost-effective and timely recovery.

New Offences

The draft legislation will introduce new offences for:

• Officers who engage in conduct that results in a CDD.
• Non-compliance with administrative orders.
• ‘Procuring, inciting, inducing or encouraging’ a company to engage in CDDs.  This is a measure specifically targeting those Pre-insolvency Advisers who actively promote phoenixing.

These new offences go part of the way, but ASIC will need to have the resources to investigate potential offences and prosecute where appropriate.  Today ASIC is able to act on only a very small proportion of the potential offences that liquidators currently report, and so adding to the already long list of potential offences without an appropriate enforcement budget will have little real impact.

Safe Harbour a defence

Effective 16 September 2016 there is a ‘Safe Harbour’ (discussed here) which protects directors from insolvent trading claims.  The CDD recovery regime will exclude transactions which are entered into whilst a company is within that ‘Safe Harbour’ – a commendable policy alignment.

Other changes

The proposals also include:

• A 28 day limit on backdating director resignations.
• Prohibition on director resignations that would leave the company with no directors.
• Related parties who acquire debt can only vote for the amount paid – not the face value of the debt – when voting on resolutions dealing with the appointment, removal or replacement of an external administration.
• The current Director Penalty Regime will be extended to cover GST, luxury car tax and wine equalisation tax.

Details of the proposals can be found here.  Submissions are due by 27 September 2018.