WHAT DO ADVISORS NEED TO KNOW?
While not defined in the legislation, illegal phoenix activity is generally seen as conduct whereby people in control of a failed company transfer the company's assets to a new entity that has zero obligations to the failed company's creditors and did not pay proper consideration for those assets.
One measure to curb illegal phoenix activity was legislation1 introducing, among other things, a voidable transaction provision in the Corporations Act 2001 that allows a liquidator or the Australian Securities and Investments Commission (ASIC) to recover property through a creditor-defeating disposition claim.
Not only do the new provisions have potential civil and criminal implications for company officers, but anyone involved in facilitating such dispositions—so parties that advise companies in a restructure ought to be across this detail.
What is a creditor-defeating disposition?
A creditor defeating disposition applies to transactions entered into on or after 18 February 2020, where company property is transferred and the consideration paid at the time of the relevant agreement (or when no agreement: at the time the disposition occurred) was less than market value (or the best reasonably obtainable value) that:
- events the property from becoming available in the liquidation for its creditors' benefit; or
- hinders, or significantly delays the process of the property being available for creditors' benefit.
The provision also includes instances where a company does something that results in another person becoming the owner of property that did not previously exist (e.g. creating an interest over property). And includes situations where payment for an asset's sale is directed to a third party, in which case the amount paid to the third party could be caught by the provisions.
‘Market value' or ‘best price reasonably obtainable'
‘Market value' is considered the price which would be paid in a hypothetical transaction between a knowledgeable and willing, but not anxious, buyer transacting at arm's length. A formal valuation can determine market value.
The alternative ‘best price reasonably obtainable' acknowledges circumstances of legitimate urgency to sell a company's assets that may be less than market value. The reasonableness of the steps the company officers took is relevant to determining whether the disposition is a creditor-defeating disposition.
Where the company fails to retain adequate records about the disposition it may be presumed that the transaction was less than market value and the best price reasonably obtainable.
A transaction that meets the above criteria may be voidable against a liquidator if:
- it occurs when the company was insolvent or became insolvent because of the disposition, and happens within 12 months before the winding up; or
- the company enters external administration within 12 months of the disposition, and a liquidator can demonstrate that the disposition contributed—directly or indirectly—to the company entering external administration.
Like the other voidable transaction provisions, the liquidator has the later of three years after the relation-back day or twelve months after the appointment to apply to court to void a creditor-defeating disposition. The relation-back day depends on the appointment type.2
ASIC has new powers to recover property for a company in liquidation and can use these either on its own initiative or when a liquidator applies to ASIC.
The new provisions introduce criminal offences and civil penalty provisions for company officers who fail to prevent the company from making a creditor-defeating disposition, and other persons that facilitate a company to make a creditor-defeating disposition.
Unscrupulous advisors involved in illegal phoenix transactions are clearly targeted with “other persons” now specified.
While a “good faith” argument can be raised by subsequent purchasers of goods, it is unavailable to the initial recipient where the transaction caused (directly or indirectly) the company to go into liquidation within 12 months.
What can you do?
To avoid falling foul of the creditor-defeating disposition provisions, here are a few steps to take:
- Ensure any assets are sold for appropriate market value and obtain a valuation to back up the sale price.
- Where relevant, ensure an appropriate sales campaign is undertaken to achieve the best price.
- Maintain adequate company books and records, including the steps taken in the sale process.
As always, contact one of our offices to get more information and clarity on the position and how it applies to your clients' circumstances.
1 Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2019 came into operation on 18 February 2020
2 The relation-back day is subject to the appointment type, being:
- A liquidation that follows a voluntary administration—date of administrators being appointed (regardless of whether a DOCA was in effect during the intervening period).
- A court appointment—date of the application being filed.
- A creditors' voluntary winding up—date of the members' meeting that resolved to wind up the company.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.