Consultation Paper: Combatting Illegal Phoenixing

What you need to know

• The Government is considering new criminal and civil sanctions to stop phoenixing.
• Insolvency practitioners who act as liquidators may find it easier to recover phoenixed assets.
• However, insolvency practitioners may face greater risk when giving restructuring advice.

The war on phoenixing

The Australian Government is looking to apply a blowtorch to those who peddle phoenixes. The reforms mooted include not only civil but criminal liability for advisers who effectuate phoenixes.

Sometimes the best restructurings, especially those with a deal of pre-packing, have elements that could be attacked as phoenix-like. If implemented, the reforms will rightly send shivers down the spines of the guilty but where the line is legitimately close, careful thought will be required.

A cab rank for liquidators is being considered to stop cosy deals being done.

An overview of the proposals

The measures contained in the Government's Consultation Paper Combatting Illegal Phoenixing (September 2017) include assistance for liquidators of companies that have been phoenixed, as well as disincentives for potential phoenix directors and their advisers.

It is often difficult for liquidators to combat phoenixing activities using the current voidable transaction regime available under Part 5.7B of the Corporations Act 2001 (Cth).

Such recoveries often require litigation and expert evidence and are notoriously difficult to prove. The Consultation Paper attempts to address these difficulties by providing an alternative to pursuing such claims through litigation, by giving liquidators the right to apply to ASIC to issue a statutory notice requiring the recipient of that notice to either pay compensation or transfer property to the insolvent estate. Such a notice would work in a way similar to notices currently issued by the Official Receiver under Division 4B in Part VI of the Bankruptcy Act 1966 (Cth).

Need to protect legitimate restructuring

Insolvency practitioners who act as restructuring advisers rather than liquidators may face an element of jeopardy, with the potential for a restructuring to be treated as phoenixing.

The key to the reforms will be to catch illegitimate phoenixing activities without stymieing otherwise legitimate corporate restructurings.

Next steps

Submissions on the Paper are requested by 27 October 2017.

Ashurst considers that phoenixing reforms are well overdue and could have a significant impact on corporate insolvencies. However, it will be important to ensure that the anti‑phoenixing measures support the Safe Harbour reforms by facilitating, rather than preventing, the development of a culture of corporate rescue in Australia.

Ashurst will monitor the progress of the proposals and would be happy to provide advice on any concerns you have about any phoenixing activities. 

Contributors: James Marshall, Ross McClymont, Emanuel Poulos, Tony Ryan and Michael Sloan (Partners); David Greenberg (Senior Associate); and Vincent Jewell (Consultant).