Crackdown on Company Directors: Parliament Regains Traction on Reforms to Combat Illegal Phoenix Act

On 4 July 2019, the Government re-introduced a number of reforms into Federal Parliament under the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (the Proposed Legislation).

The overall purpose of the Proposed Legislation is to further deter companies and their directors from engaging in “phoenix activity”, which is aimed to avoid creditors and to reduce instances of company abandonment by increasing the accountability of company directors.

While the intention and public policy behind the Proposed Legislation certainly has merit, assuming it is eventually passed, the Proposed Legislation would introduce fairly severe consequences, particularly for company directors, that could potentially restrict legitimate restructuring efforts.

What are the proposed changes?

The main features of the Proposed Legislation are as follows:

1. Phoenixing offences and property transfers to defeat creditors

Illegal phoenix activity generally involves transferring an entity’s assets to a separate, new entity (often controlled by the same party), for nominal or minimal value and continuing to conduct business under the new entity in an attempt to evade creditors, tax debts and liability for misconduct.

The Proposed Legislation proposes to prohibit any transfer of company assets for less than the market value (or best price reasonably obtainable), which would prevent, hinder or significantly delay creditors’ access to the company’s assets in liquidation (referred to as a “creditor-defeating disposition”).

Company officers and other persons (which would include professional advisors) that either facilitate or fail to prevent the company from making creditor-defeating dispositions will face severe criminal and civil penalties. Further, the Proposed Legislation aims to introduce new measures for the benefit and protection of creditors which would allow for the recovery of assets, and where necessary, provision of compensation, where there has been a creditor-defeating disposition.

The following tables provide a high-level summary of the main changes under the Proposed Legislation to combat illegal phoenix activity:

Prohibitions on a Creditor-Defeating Disposition

Recovery of Voidable Creditor-Defeating Dispositions

Compensation for Contravention

2. Improving the accountability of resigning directors

Under current laws, directors may resign at any time in writing, subject to the company’s constitution. Further, for proprietary companies, a director may be removed by a resolution of company members, unless the company’s constitution states otherwise.

There are no laws which currently prohibit a director being removed where it would leave the company without a director, leaving it to ASIC to wind up these “director-less” companies.

A company must notify ASIC that a person has ceased to be a director within 28 days after the fact in order to avoid a late notification fee from ASIC. However, as it currently stands, the date of the director’s resignation or removal as notified to ASIC will be accepted, no matter how late the notification is submitted to ASIC. This “procedural gap” provides nefarious directors with an ability to fraudulently back-date their resignations in order to shift accountability and attempt to escape liability for misconduct. Under the Proposed Legislation, this will no longer be possible.

The Proposed Legislation introduces new changes to the ability of a director to be removed from a company, as well as changes to the ASIC notification process.

The following table provides a high-level summary of the main changes under the Proposed Legislation in relation to the removal and resignation of directors:

Director Removal and Resignation

When will these changes become law?

The Proposed Legislation is before parliament for further debate this week. If all goes according to plan, the Proposed Legislation is expected to become law later this year.

The reforms, which were initially introduced in 2018 and lapsed at the last federal election, have already undergone public consultation and substantial discussion in the House of Representatives. Accordingly, there is some speculation that the Proposed Legislation is likely to be passed without significant amendment later this year.

Further information If you would like further information about the effect of the Proposed Legislation on you or your business, please contact Tom Morgan or Mark Faraday from Henry William Lawyers.This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.