New laws have been passed by the Commonwealth Government making changes to the Corporations Act to tackle illegal phoenix activity.

These laws affect not only directors of companies involved in illegal phoenixing activity, but also their advisers.

If you advise companies or their officers you need to be aware of these provisions.  If your advice touches upon the disposal of assets of a distressed company or company restructuring, it is imperative that you understand these provisions.

What is Phoenixing?

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 the liabilities in the vendor entity.

What Do the New Laws Do?

The new laws:

• Prohibit a Creditor Defeating Dispositions (CDD) of company property and allow liquidators to recover such property.
• Create civil penalties and criminal offences to penalise those who engage in such dispositions.
• Target not only company directors but also professional advisers.

What is a CDD?

A CDD is a disposition of company property for less than its market value (or best reasonably available price) that has 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.

How Are Advisers Caught?

The prohibition in respect of an adviser’s conduct arises when he/she engages in conduct of procuring, inciting, inducing or encouraging the making by a company of a CDD.  

Note the concepts of encouragement and incitement are broad concepts, capable of catching a wide range of conduct.

Obviously, these new anti-phoenixing provisions take an adviser’s liability beyond the accessorial liability found in section 79 of the Corporations Act.  That provision (entitled Involvement in contraventions) is principally concerned with active participation (such as aiding, abetting, inducing, conspiring, counselling).   There is no reference to either encouragement or incitement in section 79.

Civil and Criminal Liability

Advisers may be both criminally liable and liable on a civil basis.

Civil liability will arise when the adviser knew or ought to have known that the result would have been a CDD.

Criminal liability arises when the adviser is reckless as to the result of their conduct

Advisers are exposed to the following criminal penalties:

• Individual – Up to 10 years imprisonment and/or a fine of $945,000 or 3 times the benefit obtained.

• Company – A fine of 9,450,000 or 3 times the benefit obtained or 10% of the annual turnover of the company.

Legitimate Restructuring

Not all phoenixing activity is illegal. A legitimate business rescue conducted within the confines of the law and with the directors/officers acting bona fide is not illegal.

Conclusion

In view of the personal liability imposed upon advisers by these new provisions and the serious civil and criminal consequences for a breach, accountants, lawyers, insolvency practitioners and indeed all advisers should be made aware of the requirements of these new provisions and of the serious consequences for them of a breach.

For further information please contact Melaine Lynn (mlynn@lawfield.com.au).