Anti-phoenixing legislation (and last director resignation preclusion) comes into force

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth), which contains the Government's long-awaited anti-phoenixing reforms, has been passed by Parliament. Most of its provisions are now in force.

Phoenixing activity involves the transfer or sale of assets of a company, often at an undervalue, to another related entity (usually owned and controlled by the same persons), leaving only liabilities in the vendor entity, which is then liquidated. Creditors and tax authorities are left with little prospect of being repaid from the vendor entity, and the liquidator of the vendor entity is generally unfunded and without resources to bring proceedings against the former principals of the business for breach of duty.

A report prepared for ASIC, the ATO and the Fair Work Ombudsman (FWO) in 2018 estimated that phoenix activity cost the economy $2.85 to $5.13 billion annually and creates an unfair advantage for companies which engage in the wrongful activity and can be particularly costly for the Commonwealth Government's Fair Entitlements Guarantee (FEG) scheme, which covers employees’ entitlements left outstanding as a result of failed business enterprises, and for State and Federal revenue authorities. Combating phoenix activity is also a priority for law enforcement authorities and workplace regulators such as the FWO and the Australian Building and Construction Commission.

Since the principal perpetrators or facilitators of wrongful phoenix activity are the directors (and shadow or de facto directors) of a company, the Act's focus is on those persons.

Key features of the Act are:

• measures to tackle below-value transactions that prejudice creditors in a liquidation with criminal and civil penalties and mechanisms for unwinding the transactions;
• measures to prevent directors from improperly backdating resignations or resigning if they are last remaining director; and
• extension of the PAYG and SGC estimates regime and director penalty regime to GST liabilities.

The restriction on the last remaining director resigning is a seminal change in Australian corporations law which will affect all directors (not just those who participate in phoenix activity).

The Act complements other Government initiatives designed to combat phoenix activity, including:

• the Phoenix Taskforce, a successful anti-phoenixing initiative spanning 37 Federal, State and Territory Government agencies, which has seen an increase in prosecutions and recoveries;
• the FEG Recovery Program, which funds recovery proceedings for taxpayers' benefit;
• the ATO phasing in single touch payroll reporting; and
• the Australian Law Reform Commission Discussion Paper (87) on corporate criminal responsibility.

Some aspects of the new legislation have come under criticism. The Law Council of Australia and the Australian Law Reform Commission Discussion Paper expressed concerns that the Act confers powers on ASIC to unwind below-value transactions that prejudice creditors which may be unconstitutional. The provisions against below-value transactions may also hamper legitimate restructuring efforts. A five-year independent review into the operation of some of the amendments, required by Senate amendments to the legislation, is likely to consider these issues.

The amendments to the Corporations Act commenced on 18 February 2020 and the amendments to taxation legislation will commence on 1 April 2020.