Illegal phoenix activity: the 2020 reforms and the offences

What illegal phoenixing is

Phoenix activity involves the transfer of assets from a company that owes money to a new company at an undervalue. This process leaves creditors of the original company unable to recover what they are owed.

It is important to recognise that not all instances of phoenixing are illegal. Legitimate business restructures can involve similar processes. The 2020 reforms specifically target dishonest actions where assets are stripped to benefit insiders.

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 introduced new offences relating to this dishonest activity into the Corporations Act 2001.

The 'creditor-defeating disposition' offence

The Corporations Act 2001 now includes a regime addressing ‘creditor-defeating dispositions’ through sections 588FDB and 588GAB. A creditor-defeating disposition occurs when company property is transferred for less than its market value, or less than the best price reasonably obtainable, and this transfer prevents, hinders, or significantly delays the property’s availability to satisfy creditors if the company is wound up.

These provisions specifically apply to dispositions that cause a company to become insolvent, or that occur when a company is already insolvent. The effect is to target actions that actively worsen a company’s financial position and disadvantage creditors. Directors and other officers who participate in, or facilitate, these dispositions may face personal liability. director duties self-check

To summarise, a creditor-defeating disposition involves:

• A transfer of company property
• At a value below market value or the best obtainable price
• That impacts the ability of creditors to recover funds in a winding up.

Penalties and enforcement

Criminal penalties for directors involved in or facilitating illegal phoenixing activity can be severe, with a maximum imprisonment term of 15 years. Civil penalties also apply, in addition to any criminal sanctions.

The Australian Securities and Investments Commission (ASIC) possesses extensive powers to recover assets that have been subject to illegal phoenixing. These powers allow the liquidator to pursue the recovery of the disposed-of property, or its equivalent value.

The introduction of the Director Identification Number regime, requiring all directors to hold a director ID check, is intended to strengthen enforcement. This system aims to prevent directors from easily abandoning a failed company and establishing new entities to avoid obligations.

Advisers' exposure

The new offences relating to illegal phoenix activity extend beyond directors of the companies involved. They also capture individuals who facilitate the disposition of assets, which can include certain advisers such as accountants and pre-insolvency advisers. Liability arises where an adviser knew, or ought to have known, that their actions were contributing to illegal phoenix activity. penalty estimator

ASIC and the Phoenix Taskforce (a collaboration between the ATO and ASIC, among others) are actively investigating the role of advisers in phoenix arrangements. This highlights the increasing regulatory scrutiny of pre-insolvency advice, a developing area of practice.

Practitioners working with distressed businesses should recognise the heightened risk of exposure. A documented advice process and clearly defined terms in engagement letters are essential to mitigate this risk.