House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon. Michael Sukkar MP)

Chapter 2 Phoenixing offences and property transfers to defeat creditors

Outline of chapter

2.1 Schedule 1 to the Bill introduces new phoenixing offences to prohibit creditor-defeating dispositions of company property, penalise those who engage in or facilitate such dispositions, and allow liquidators and ASIC to recover such property.

Context of amendments

2.2 Australia's corporate insolvency laws aim to balance the freedom of companies to engage in commercial risk-taking against the legitimate interests and expectations of creditors, including company employees. The Government has made a number of reforms to the law in recent years to ensure this balance is appropriate and to ensure that misconduct can be addressed quickly and efficiently.

2.3 The Corporations Act 2001 imposes duties on directors and other officers to act in the best interests of the company generally, and specific duties that protect the interests of the company's creditors. The most serious breaches of these duties are subject to criminal offences in addition to civil remedies: for example, officers acting for an improper purpose (section 184) or failing to prevent the company from trading while insolvent (section 588G).

2.4 Part 5.7B of the Corporations Act 2001 enables company liquidators to recover - on behalf of insolvent companies and their creditors - compensation from directors that fail to prevent insolvent trading (Division 4) and to seek court orders voiding certain transactions, including insolvent transactions and uncommercial transactions (Division 2). This allows liquidators and insolvent companies to better meet the legitimate demands of creditors affected by the insolvency.

2.5 The prohibition against insolvent trading (and associated compensation mechanisms) is subject to an important defence known as the safe harbour (section 588GA). Introduced as part of the Government's National Innovation and Science Agenda, the safe harbour encourages companies in legitimate financial difficulty to undertake a restructure in certain circumstances.

2.6 The safe harbour is intended to drive cultural change among company directors by encouraging them to engage early with financial hardship, keep control of their company and take reasonable risks to facilitate the company's recovery, rather than prematurely placing the company into voluntary administration. The safe harbour is subject to a number of limitations that make it unattractive to dishonest directors who may want to illegally phoenix their company.

Summary of new law

2.7 Schedule 1 to the Bill amends the Corporations Act 2001 to improve the mechanisms available to combat illegal phoenix activity, specifically creditor-defeating dispositions: transfers of company assets for less than market value (or the best price reasonably obtainable) that prevent, hinder or significantly delay creditors' access to the company's assets in liquidation.

2.8 The amendments introduce new criminal offences and civil penalty provisions for:

•

company officers that fail to prevent the company from making creditor-defeating dispositions; and

•

other persons that facilitate a company making a creditor-defeating disposition.

2.9 These offences are subject to a number of important safe-guards to ensure the amendments do not affect legitimate businesses and commercial transactions. This includes maintaining the safe harbour for legitimate business restructures and respecting transactions made with creditor or court approval (as appropriate) under a deed of company arrangement or scheme of arrangement.

2.10 To protect creditors, these amendments make a number of refinements to the law to allow for the efficient recovery of assets and, where necessary, the provision of compensation. In particular, the amendments provide that:

•

liquidators can seek to recover the assets or other consideration through the courts for the benefit of the company's creditors;

•

ASIC can make orders to recover assets for the company's creditors; and

•

liquidators - and in some cases creditors - can recover compensation from a company's officers and other persons responsible for a company making a creditor-defeating disposition.

Comparison of key features of new law and current law

Detailed explanation of new law

Creditor-defeating dispositions

2.11 The concept of a creditor-defeating disposition is central to the amendments in Schedule 1 to the Bill. A creditor-defeating disposition may be a voidable transaction recoverable by the liquidator on application to ASIC or the Court. An officer or other person responsible for a company making a creditor-defeating disposition may be subject to criminal charges, civil penalties and compensation orders.

2.12 A creditor-defeating disposition is a disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company's creditors in winding-up. [Schedule 1, items 1 and 18, subsection 588FDB(1) and section 9 (definition of 'creditor-defeating disposition') of the Corporations Act 2001]

2.13 The creation by the company of a right or other interest in property in favour of another person is taken to be a disposition of the right or other interest in property and may constitute a creditor-defeating disposition. [Schedule 1, item 18, subsection 588FDB(2) of the Corporations Act 2001]

2.14 In some circumstances, there is an extension to the concept of a disposition to reflect the economic substance of a transaction. Where a company disposes of property to one person and that person pays some or all of the consideration to a third party, the company is taken to have made:

•

a disposition of the property actually transferred; and

•

a disposition of the consideration paid to the third party.

2.15 The extended concept of a disposition ensures the outcome is the same as if the company received all of the consideration itself and then provided that consideration to the third party. [Schedule 1, item 18, subsection 588FDB(3) of the Corporations Act 2001]

Example 2.1 Creditor-defeating disposition of a company

On 24 February 2020, LTV Commercial Pty Ltd sells a commercial property to Alexia who wants to set up a dancing studio. LTV Commercial and Alexia agreed that the purchase price for the property is $500,000. The property was the company's major asset.

During the transaction, LTV Commercial instructed Alexia to pay the amount of $500,000 to RGV Dance Pty Ltd. Ronie is both the sole director and company secretary of LTV Commercial and RGV Dance.

On 24 August 2020, a liquidator is appointed in the winding up of LTV Commercial. The company has insufficient assets to meet the demands of its creditors.

LTV Commercial has made two dispositions. The first is of its commercial property to Alexia. The second is of $500,000 to RGV Dance.

If the $500,000 reflects the market value of the property, the transfer of the property is not a creditor-defeating disposition. However, the deemed transfer of the $500,000 to RGV Dance is a creditor-defeating disposition because it is for no consideration.

Market value consideration

2.16 A particular asset of the company not being available for division among creditors on winding up is not in and of itself a creditor-defeating disposition. It is also necessary to establish the company received consideration that was less than the market value of the property disposed of and less than the best price reasonably obtainable for the disposition. [Schedule 1, item 18, paragraph 588FDB(1)(a) of the Corporations Act 2001]

2.17 The test is applied at the time the relevant agreement for the disposition is entered into or - if there is no agreement for the disposition - at the time of the disposition.

2.18 In this context, market value means the price that would be paid in a hypothetical transaction between a knowledgeable and willing, but not anxious, seller to a knowledgeable and willing, but not anxious, buyer, who transact at arm's length. [Schedule 1, item 18, subparagraph 588FDB(1)(a)(i) of the Corporations Act 2001]

2.19 The alternative test of 'the best price reasonably obtainable' recognises there will be legitimate situations where a company may need to realise assets at less than market value. This is particularly the case for companies in legitimate financial difficulty that have urgent cash flow needs. The legitimate urgency with which these companies may seek to realise the value of assets means their actual disposal of assets may not realise the same market value price as the hypothetical not anxious seller. [Schedule 1, item 18, subparagraph 588FDB(1)(a)(ii) of the Corporations Act 2001]

2.20 In these cases, the circumstances of the disposition - including the financial circumstances of the company - and the reasonableness of the steps the company took or should have taken to realise the value of the asset will be relevant to determining whether the disposition is a creditor-defeating disposition. For example, a company that sells property through a reasonable process such as a public auction designed to obtain the best price available will not make a creditor-defeating disposition.

2.21 Where an asset's market value is reasonably obtainable, the best price reasonably obtainable in the circumstances is not less than the asset's market value. In such cases, establishing that the consideration the company received was less than the asset's market value will also establish that it was less than the best price reasonably obtainable.

Example 2.2 Market value and the best price reasonably obtainable

Contrast Industries Pty Ltd is a building supply company. In June 2019, the company is in financial difficulty but is solvent and continuing to trade.

Contrast Industries enters into a contract with Kurt Developments Pty Ltd for the supply of building materials with a market value of $55,000. The contract is negotiated on an arms' length basis but Contrast Industries is not in a strong negotiating position because of its financial position.

Recognising its advantage, Kurt Developments shrewdly offers a below-market price of $50,000 for the materials. Contrast Industries, in urgent need of a sale and fearing any worsening of its financial position will further reduce the price it can obtain, accepts the offer.

In September 2019, the financial position of Contrast Industries has worsened. Contrast Industries enters into a second contract for the supply of a similar quantity of building supplies to Glee Homes Pty Ltd. However, this contract is for $10,000. The directors of the two companies are former business associates.

In January 2020, Contrast Industries goes into liquidation with insufficient funds to pay its employees or other creditors.

The sale to Kurt Developments is not a creditor-defeating disposition because the price obtained was the best price reasonably available in the circumstances even if it was not able to achieve a market value sale.

The sale to Glee Homes is a creditor-defeating disposition because the value of the contract far exceeds the $10,000 paid in consideration and a better price could have been obtained if Contrast Industries took reasonable steps to realise the value of the goods.

Presumption of insufficient consideration

2.22 It is presumed that a disposition is not for market value or the best price reasonably obtainable where the company did not maintain adequate records relating to the disposition. However, this presumption does not apply in criminal proceedings. [Schedule 1, items 2, 3 and 9, section 111Q and subsection 588E(4A) of the Corporations Act 2001]

2.23 This presumption is necessary to ensure that company officers engaging in illegal phoenix activity cannot avoid the voiding of transactions by committing further breaches of the law to obscure the details of an improper transaction.

2.24 The presumption does not apply to minor or technical failures to maintain records. [Schedule 1, item 10, subsection 588E(5) of the Corporations Act 2001]

2.25 The presumption does not affect a third party if the records were destroyed, concealed or removed by a person and the third party was not in any way responsible for the destruction, concealment or removal of the records. [Schedule 1, item 11, subsection 588E(6) of the Corporations Act 2001]

Voiding the transaction

2.26 A transaction is voidable if it is a creditor-defeating disposition made by a company at a time when the company is insolvent, or, because of the disposition, the company immediately becomes insolvent or enters external administration within the following 12 months. [Schedule 1, items 19 and 20, paragraphs 588FE(1)(c), (6B)(a) and (b) of the Corporations Act 2001]

2.27 Describing a transaction as voidable allows a court, on the application of a company's liquidator, to make a range of orders to void the transaction and to restore the parties to the position they would have been in but for the transaction (section 588FF). A liquidator can apply to a court before the later of:

•

3 years after the relation-back day (see section 91 for the definition of relation-back day); or

•

12 months after the liquidator was first appointed.

Where a company is insolvent or becomes insolvent

2.28 Establishing that a company was insolvent (or became insolvent as a result of a disposition) is the primary method for voiding a creditor-defeating disposition. Dispositions made outside of this period and the 12 months prior to entering external administration are more likely to be undertaken for legitimate commercial reasons. Losses experienced outside this period may reflect the ordinary course of entrepreneurial risk-taking, which is not the target of these amendments.

2.29 Dispositions made while a company is insolvent or in the period before the company enters external administration warrant a higher degree of scrutiny. This ensures the interests of creditors are protected and company officers are acting properly.

2.30 A disposition made when the company is insolvent or becomes insolvent is only voidable if it is also made during the 12 months ending on the relation-back day or both after that day and on or before the day the winding up began. [Schedule 1, item 20, subparagraphs 588FE(6B)(b)(i) and (ii) of the Corporations Act 2001]

2.31 Section 588E applies a presumption of insolvency where a company has failed to keep or maintain financial records in accordance with section 286. This presumption is necessary to ensure that company officers engaging in illegal phoenix activity cannot avoid the voiding of transactions by committing further breaches of the law to obscure a company's financial position. This presumption applies to voidable transactions generally.

2.32 However, the presumption does not affect a third party if the records were destroyed, concealed or removed by a person and the third party was not in any way responsible for the destruction, concealment or removal of the records (subsections 588E(4) and (6)).

Where a company enters external administration after disposition

2.33 The extension of the period in which a creditor-defeating disposition may be voidable to the 12 months prior to the company entering external administration is an important amendment to ensure liquidators can effectively challenge illegal phoenix activity. It is necessary for liquidators to demonstrate that the disposition contributed - directly or indirectly - to the company entering external administration within the 12-month period. [Schedule 1, item 20, subparagraph 588FE(6B)(b)(iii) of the Corporations Act 2001]

2.34 A company enters external administration:

•

on a day an administrator of the company is appointed under section 436A, 436B or 436C;

•

on the day a deed of company arrangement is executed;

•

on a day the winding up of the company is taken to have begun under section 513A or 513B; and

•

on a day a provisional liquidator is appointed.

2.35 Placing a company into administration shortly after it makes a voidable transaction is a common illegal phoenix activity. A persistent issue in the practical operation of the corporate insolvency law is the cost and uncertainty associated with establishing that a company was insolvent at a particular time. This cost can make it impractical for liquidators to pursue many recovery actions, frustrating the intention of the law.

2.36 Together with the presumption of insolvency where financial records are not maintained, this amendment is intended to significantly ease the burden on liquidators pursuing illegal phoenix activity and recovering assets for the benefit of company creditors.

Good faith

2.37 Subsection 588FG(1) prevents a court making an order in relation to a voidable transaction if the order is prejudicial to the rights of a person who is not a party to the transaction - for example a subsequent purchaser - who has acquired the property in good faith without notice of the company's insolvency.

2.38 Subsection 588FG(2) prevents a court making an order which is prejudicial to the rights of a party to the transaction who became a party in good faith and is a purchaser for value, without notice of company's insolvency.

2.39 Subsections 588FG(1) and (2) do not apply in relation to an order based solely on the transaction being a creditor-defeating disposition because the disposition caused the company to enter external administration. This reflects that it is unnecessary to establish the company was insolvent if the company enters external administration within 12 months of the disposition. [Schedule 1, item 24, subsection 588FG(7) of the Corporations Act 2001]

2.40 Subsections 588FG(1) and (2) will continue to apply if an order would also be based on the transaction being made while the company was insolvent, the transaction causing the company to become insolvent or the transaction being voidable on some other ground.

2.41 A general good faith test applies to subsequent purchasers of property that was the subject of a creditor-defeating disposition (regardless of whether the initial company was insolvent at the time). Where an initial creditor-defeating disposition is voidable, a subsequent purchaser's title to property is protected provided the subsequent purchaser acquired the property in good faith. The subsequent purchaser's claim to the property will be voidable if that person acted in bad faith, for example because they knew the initial transfer was voidable or were wilfully blind to the likelihood that the initial transfer was voidable. [Schedule 1, item 24, subsection 588FG(9) of the Corporations Act 2001]

Example 2.3 Good faith test for subsequent purchasers

Further to Example 2.2, Daniel, the sole director of Glee Homes learns the liquidator of Contrast Industries is investigating its purchase of building materials. Glee Homes transfers the building materials to Laundry Solutions Pty Ltd in January 2020.

The liquidator learns that Daniel is also the sole director of Laundry Solutions. The liquidator can seek a court order to void Laundry Solutions' claim to the property because it is clear it had knowledge that the original transfer was voidable and acquired the property in bad faith.

Where a disposition is not voidable

2.42 A creditor-defeating disposition is not voidable (or is not subject to court orders under section 588FF) if the disposition:

•

was made under a deed of company arrangement or scheme of arrangement;

•

was made by the company's administrator or liquidator; or

•

was made in connection with a course of action that satisfies the safe harbour in the corporations law.

Deeds of company arrangement and schemes of arrangement

2.43 A deed of company arrangement is a binding arrangement between a company and its creditors governing how the company's affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration. It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up of the company, or both (see section 435A).

2.44 Similarly, schemes of arrangement under Part 5.1 may be used to affect a legitimate restructure. These schemes are subject to creditor or member approval, and ASIC and judicial oversight.

2.45 A creditor-defeating disposition does not form part of a voidable transaction if it is made under a deed of company arrangement or scheme of arrangement. Due to the oversight of creditors, ASIC and the Court (as appropriate), it is inappropriate to void a transaction entered into under the terms of these arrangements. [Schedule 1, item 20, subparagraphs 588FE(6B)(c)(i) and (ii) of the Corporations Act 2001]

Administrator and liquidator transactions

2.46 The amendments do not apply to transactions made by a liquidator, provisional liquidator or external administrator appointed by the company exercising their duties in the course of the administration or winding-up of the company. This is consistent with the operation of the existing voidable transaction provisions. [Schedule 1, item 20, subparagraphs 588FE(6B)(c)(iii), (iv) and (v) of the Corporations Act 2001]

2.47 Liquidators and administrators are officers of the company and are subject to a number of obligations under the Corporations Act 2001 , including the duty to act in the best interests of the company. The Government's 2016 reforms to the regulation of external administrators provide a sufficient safeguard against misconduct (see Schedule 2 to the Corporations Act 2001 ) and appropriate remedies if misconduct does occur.

2.48 Company administrators may still be liable for any contravention of the prohibition on creditor-defeating dispositions (see paragraphs 2.65 and 2.83). External administration is a preliminary form of administration, where realising company assets that are restricting a business can be critical to the ability of the company to continue trading in the future. It is important that dispositions undertaken during external administration (other than those undertaken as part of an arrangement with creditors) are scrutinised and improper dispositions penalised. This ensures external administrators acting recklessly or unreasonably, and those that are complicit in illegal phoenix activity, are subject to the criminal and civil penalty provisions.

2.49 Liquidators and provisional liquidators are not subject to criminal liability or the civil penalty provisions. This reflects that liquidation is a final form of administration, which involves the orderly winding-up a company's affairs.

The safe harbour

2.50 The safe harbour in section 588GA currently protects directors from liability for debts incurred by an insolvent company in connection with a course of action that is reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator.

2.51 The amendments extend the operation of the safe harbour so it applies to dispositions of property, in addition to a company's incurring of a debt, where a company is undertaking a restructure. A court cannot make an order under section 588FF for a voidable creditor-defeating disposition if section 588GA would apply to an officer of the company in relation to the disposition (see paragraphs 2.91 to 2.94). This limitation does not prevent the transaction being described as voidable in the law but does prevent a court from actually voiding the transaction. [Schedule 1, item 24, subsection 588FG(8) of the Corporations Act 2001]

Recovery by ASIC

2.52 The amendments ensure ASIC has power to take effective action against illegal phoenix activity and protect the interests of legitimate creditors. This will:

•

overcome difficulties faced by liquidators where the company has insufficient funds to cover the cost of court action; and

•

allow ASIC to intervene where a liquidator is not fulfilling its obligations to recover company property, for example because the liquidator is complicit in the illegal phoenix activity of a company director.

2.53 The amendments grant ASIC specific powers to make administrative orders to recover property the subject of voidable creditor-defeating dispositions. ASIC may use these powers to recover property for a company in liquidation on its own initiative or on the application of a liquidator. A liquidator may apply to ASIC in the same timeframes it may apply to a court under section 588FF (see paragraph 2.27). [Schedule 1, item 25, subsections 588FGAA (1) and (2) of the Corporations Act 2001]

Making the administrative order

2.54 ASIC's powers are directed to the entities that receive the benefit of a voidable creditor-defeating disposition. This may include subsequent beneficiaries where the property has been transferred subsequent to the initial creditor-defeating disposition.

2.55 ASIC may require a person to:

•

return the property to the company for distribution to its creditors;

•

pay an amount equal to the benefit the person received from the creditor-defeating disposition; or

•

transfer property that was purchased with the proceeds of sale of a creditor-defeating disposition (or similar dealings).

[Schedule 1, item 25, subsection 588FGAA(3) of the Corporations Act 2001]

2.56 ASIC may not make an administrative order if the safe harbour would apply to the disposition or the initial disposition was for market value. Further, ASIC may not issue an administrative order against a good faith purchaser in circumstances where a court could not make an order under section 588FF. [Schedule 1, item 25, subsection 588FGAA(4) of the Corporations Act 2001]

2.57 Before ASIC may make an administrative order, it must consider the conduct of the company, its officers, any relationships between the company and the person who received the disposed property, and the circumstances, nature and terms of the disposition. [Schedule 1, item 25, subsection 588FGAA(5) of the Corporations Act 2001]

2.58 If ASIC is satisfied that an administrative order should be made, it must give copies of the order and the written reasons for the order to the person subject to the order and to the company's liquidator. If the administrative order requires the payment of an amount to the company, the order may set a time for the payment. [Schedule 1, item 25, section 588FGAB of the Corporations Act 2001]

2.59 ASIC may revoke an administrative order at any time. If it revokes an administrative order, ASIC must notify the person subject to the order. [Schedule 1, item 25, subsection 588FGAA(6) of the Corporations Act 2001]

Compliance with administrative orders

2.60 A person subject to an administrative order must comply with its terms. Conduct in contravention of an administrative order or a failure to do something required by the order is an offence. 'Conduct' is defined in section 9 of the Corporations Act 2001 as both acts and omissions. A contravention is subject to a penalty of up to 60 penalty units. [Schedule 1, items 25 and 101, section 588FGAC and Schedule 3 to the Corporations Act 2001]

2.61 If the administrative order relates to the payment of money, the company may recover the amount as a debt. If ASIC commences proceedings in relation to a person's failure to comply with an administrative order, the court may order the person to pay the amount to the company (in addition to paying the penalty to ASIC for non-compliance with the administrative order). [Schedule 1, item 25, subsections 588FGAD(1) and (2) of the Corporations Act 2001]

Example 2.4 Non-compliance with administrative orders

Super Lightspeed Pty Ltd disposes and sells its commercial unit to Nicholas in April 2019. Nicholas pays the purchase price of $980,000 to Super Lightspeed. The commercial unit's market value is $1,180,000. Super Lightspeed and Nicholas are unrelated parties.

On 1 September 2019, a liquidator is appointed for Super Lightspeed. Upon winding up of Super Lightspeed, the liquidator discovers that Nicholas has purchased the commercial unit below its market value. In the circumstances, the liquidator believes the company could have obtained market value for the sale of the unit. The liquidator makes an application to ASIC to make administrative orders against Nicholas for the amount of $200,000.

On 28 September 2019, Nicholas receives an administrative order from ASIC ordering him to pay the amount of $100,000 by 28 October 2019 and $100,000 to Super Lightspeed by 28 January 2020. Nicholas fails to pay the amounts within the periods specified in the administrative order.

In February 2020, ASIC begins Court proceedings to enforce the order. The Court makes a judgment in ASIC's favour and orders Nicholas to transfer the $200,000 to Super Lightspeed.

Nicholas may also face civil penalties.

2.62 A person ordered to pay a company the present value of any property may instead transfer the property to the company. This applies where ASIC orders a person to return the benefit they obtained directly or indirectly from a voidable transaction, which may include property other than the property that was the subject of the initial creditor-defeating disposition. [Schedule 1, item 25, subsection 588FGAD(3) of the Corporations Act 2001]

Applications to set aside administrative orders

2.63 A person may apply to the Court to have an administrative order set aside if the person believes the order has been made in error. Applications must be made within 60 days of the applicant receiving the notice or becoming aware of the administrative order. [Schedule 1, item 25, section 588FGAE of the Corporations Act 2001]

2.64 A person may also apply to the Administrative Appeals Tribunal in relation to ASIC's decision to issue an administrative order (section 1317B).

Offences and civil penalty provisions

2.65 The amendments in Schedule 1 to the Bill make it an offence for a company officer or a facilitator such as a pre-insolvency adviser to cause a company to make a creditor-defeating disposition. The object of the new offences is to target asset stripping behaviour designed to avoid a company paying creditors' entitlements. The asset stripping behaviour targeted by these amendments is a common characteristic of illegal phoenixing. [Schedule 1, item 33, section 588GAA of the Corporations Act 2001]

2.66 The elements of the offences and the defences available largely mirror the elements that apply to making a creditor-defeating disposition voidable. Differences include additional specific elements and defences that focus on the conduct of the officer or facilitator alleged to be responsible for the company making the disposition.

2.67 In addition, the amendments create civil penalty provisions equivalent to each of the offence provisions. This results in four provisions providing penalties for prohibited creditor-defeating dispositions:

•

a criminal offence that applies to officers that engage in conduct that results in the company making a prohibited creditor-defeating disposition. The central mental element of the offence is recklessness;

•

a civil penalty provision that applies to officers that engage in conduct that results in a company making a disposition where a reasonable person would have known the disposition was a prohibited creditor-defeating disposition;

•

a criminal offence that applies to persons that procure, incite, induce or encourage a company to make a prohibited creditor-defeating disposition. The central mental element of the offence is recklessness; and

•

a civil penalty provision that applies to a person that procures, incites, induces or encourages a company to enter into a disposition where a reasonable person would have known the disposition was a prohibited creditor-defeating disposition.

Officer's duty to prevent prohibited creditor-defeating dispositions

Criminal offence

2.68 An officer's culpability is assessed according to the conduct they intentionally engage in. This includes acts and omissions of the officer (section 9 of the Corporations Act 2001 ). [Schedule 1, item 33, subsection 588GAB(1) of the Corporations Act 2001]

Recklessness as to creditor harm

2.69 To be held criminally responsible, the officer must be reckless as to the result of their conduct: the result being the company making a creditor-defeating disposition. A person is reckless with respect to a result if they are aware of a substantial risk that the result will occur and, having regard to the circumstances known to them, it is unjustifiable to take the risk, or they know the result will occur (section 5.4 of the Criminal Code ). The question of whether taking a risk is unjustifiable is one of fact. [Schedule 1, item 33, subsection 588GAB(1) of the Corporations Act 2001]

Disposition made at particular time

2.70 In addition, it is necessary to establish the creditor-defeating disposition was made at a particular time. A creditor-defeating disposition is prohibited if it is made:

•

when the company is insolvent (or becomes insolvent because of the disposition);

•

within the 12 months prior to the company entering external administration (if the disposition contributed to the company entering external administration); or

•

within the 12 months prior to the company ceasing to carry on business altogether (if the disposition contributed to the company ceasing to carry on business altogether).

[Schedule 1, item 33, paragraphs 588GAB(1)(a), (b), (c) and (d) of the Corporations Act 2001]

2.71 The times at which a creditor-defeating disposition is prohibited broadly reflect the voidable transaction amendments (see paragraph 2.26). Further to the voidable transaction amendments, a creditor-defeating disposition is also prohibited if it is made within the 12 months prior to the company ceasing to carry on business altogether. This rule only applies where the company has permanently ceased to carry on all business activities. It does not apply merely because a company ceases one of a number of businesses it carries on, changes businesses or is not carrying on any business for a limited time. [Schedule 1, item 33, paragraph 588GAB(1)(d) of the Corporations Act 2001]

2.72 This will help address the common situation where directors involved in phoenix activity strip a company's assets and abandon the company without taking steps to appoint an administrator or a liquidator to wind-up the company. It may be easier in some instances to establish that a company ceased to carry on business altogether shortly after a disposition took place than to establish insolvency.

2.73 It is necessary to establish the defendant was reckless as to the existence of this circumstance (i.e. present insolvency) or the risk of the result (i.e. becoming insolvent, entering external administration or ceasing to carry on business), or had knowledge of it.

2.74 A person is reckless with respect to a circumstance if they are aware of a substantial risk that the circumstance exists or will exist and having regard to the circumstances known to him or her, it is unjustifiable to take the risk (section 5.4 of the Criminal Code ; for reckless as to a result, see paragraph 2.69).

Civil penalty

2.75 The civil penalty provision applies generally in the same terms as the offence. However, the recklessness fault element that applies to the criminal offence is not required for the equivalent civil penalty provision.

2.76 To establish a contravention of a civil penalty provision, it is sufficient to establish a reasonable person would know the result of their conduct would be the company making a creditor-defeating disposition that prevents, hinders or significantly delays the disposed property becoming available to creditors. This is a negligence standard. [Schedule 1, item 33, subsection 588GAB(2) of the Corporations Act 2001]

2.77 In addition, the presumptions of insolvency and insufficient consideration apply if the company failed to keep adequate financial records. However, these presumptions do not affect an officer if the records were destroyed, concealed or removed by another person and the officer was not in any way responsible. [Schedule 1, items 8 to 11, subsection 588E(1) (paragraph (ea) of the definition of 'recovery proceeding'), and subsections 588E(4A), (5) and (6) of the Corporations Act 2001]

2.78 If a presumption applies, the defendant will need to prove matter that is the subject of the presumption: the solvency of the company or that sufficient consideration was provided to the company for the disposition. The reversal of the onus of proof is appropriate because companies are under an obligation to maintain financial records and it is unreasonable for ASIC to be required to prove a fact that has been intentionally concealed by the defendant.

2.79 Defences to the offence and the civil penalty provision are discussed in paragraphs 2.83 to 2.104.

Facilitators procuring creditor-defeating disposition

2.80 The offence and civil penalty provisions for procuring a company to make a creditor-defeating disposition mirror the prohibition on conduct by officers. The difference is that a broader range of persons - both natural persons and legal persons - may be involved in a contravention. In addition, the basis for a person's culpability is specific conduct to procure, incite, induce or encourage the company to make the disposition. [Schedule 1, item 33, subsections 588GAC(1) and (2) of the Corporations Act 2001]

2.81 The purpose of this prohibition is to address the actions of unscrupulous facilitators and pre-insolvency advisers, and other entities that, while not formally responsible for the management of a particular company, are responsible for designing and implementing illegal phoenix schemes.

2.82 A body corporate may engage in conduct that results in a contravention of the offence provision. This requires establishing that an individual procured, incited, induced or encouraged a company to make a prohibited creditor-defeating disposition and that individual did so within the actual or apparent scope of his or her employment, or within his or her actual or apparent authority of the body corporate (section 12.2 of the Criminal Code ). Under section 12.3 of the Criminal Code , it is also necessary to establish:

•

the board of the body corporate or a high managerial agent knowingly or recklessly carried out the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or

•

a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance.

Defences

2.83 The following defences apply uniformly to the criminal offence and the civil penalty provisions for both officers and other persons:

•

the disposition was made under a deed of company arrangement or scheme of arrangement (see paragraphs 2.43 to 2.45); [Schedule 1, item 33, paragraphs 588GAB(3)(a) and (b), and 588GAC(3)(a) and (b) of the Corporations Act 2001]

•

the disposition was made by the company liquidator (see paragraphs 2.46 and 2.47); [Schedule 1, item 33, paragraphs 588GAB(3)(c) and (d), and 588GAC(3)(c) and (d) of the Corporations Act 2001]

•

the disposition was made in connection with a course of action and the safe harbour applies to the defendant.

2.84 In addition, it is a defence to a contravention of the new civil penalty provisions if:

•

the defendant had reasonable grounds to expect the company was solvent at the time of the disposition (except where the company enters external administration or ceases to carry on business altogether because of the disposition within 12 months);

•

the defendant took all reasonable steps to prevent the company making the disposition; or

•

in the case of a defendant that is a director - because of illness of some other good reason, the defendant did not take part in the management of the company at the relevant time.

2.85 These lists do not exclude other defences of general application available under the Criminal Code .

2.86 The first two defences - liquidator transactions and dispositions under a deed of company arrangement or scheme of arrangement - apply to the nature of the disposition and are discussed earlier in this Chapter. The other defences relate specifically to the conduct of the defendant and are discussed below.

2.87 Defendants bear an evidential burden in relation to each of the defences. An evidential burden means the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist (subsection 13.3(6) of the Criminal Code ). If a defendant satisfies an evidential burden, the prosecution in a criminal matter may disprove the existence of the defence by establishing its non-existence beyond reasonable doubt (subsections 13.1(2) and 13.2(1) of the Criminal Code ).

2.88 This evidential burden is appropriate as these matters are peculiarly in the mind of a defendant. In the case of defendants that are company officers, these matters also relate to matters that the officer ought to have considered in fulfilling their duties to the company.

2.89 For example, a company officer or other person relying on the safe harbour defence will be required to point to evidence that suggests that they started to develop a course of action reasonably likely to lead to a better outcome for the company after starting to suspect the company was insolvent.

2.90 It is appropriate for this evidential burden to apply to a person wishing to rely on safe harbour because:

•

details about the courses of action developed are peculiarly within the person's knowledge; and

•

it would be significantly more difficult and costly for the prosecution to disprove the possibility that the person developed a course of action reasonably likely to lead to the better outcome for the company.

The safe harbour

2.91 The safe harbour is an important defence available if the disposition is made in connection with a course of action that is reasonably likely to lead to a better outcome for the company than proceeding immediately to voluntary administration or winding up. The defence is a personal defence and depends on the actions the specific defendant took to develop the company's course of action, and their other conduct. [Schedule 1, items 34 and 35, subsection 588GA(1) of the Corporations Act 2001]

2.92 There are circumstances that make the safe harbour unavailable. The first is where a company is failing to pay the entitlements of its employees by the time they fall due. The second is where a company has not complied or is not complying with its taxation reporting obligations. In both these cases, a person will not be eligible for the safe harbour defence. [Schedule 1, items 37 and 38, subsection 588GA(4) of the Corporations Act 2001]

2.93 The safe harbour is not available if the person fails to substantially comply with their obligations to assist a liquidator or controller (or an administrator - see paragraph 2.125) in a formal insolvency. [Schedule 1, items 39 and 40, subsection 588GA(5) of the Corporations Act 2001]

2.94 Similarly, subsections 588GB(1) and (2) prevent a director from relying on books or information as evidence for the application of the safe harbour where these materials have not been provided to a liquidator, administrator or controller as required. [Schedule 1, item 44, subsection 588GB(7) (paragraph (a) of the definition of 'relevant proceeding') of the Corporations Act 2001]

2.95 As with the other defences, a defendant bears an evidential burden in relation to the safe harbour. [Schedule 1, item 36, subsection 588GA(3) of the Corporations Act 2001]

Expectation of solvency on reasonable grounds

2.96 A defence is available for a civil penalty contravention if a defendant had reasonable grounds to expect, and did expect, the company was solvent and would remain solvent despite making the disposition. [Schedule 1, items 45, 46 and 47, subsections 588H(1) and (2) of the Corporations Act 2001]

2.97 An expectation of solvency must be supported by facts that point to a high degree of certainty. A mere hope, possibility or suspicion that the company is solvent is insufficient. A person who is unaware whether the company is solvent - particularly a person who, because of their position, could not know - cannot rely on the defence.

2.98 A defendant may rely on a competent and reliable person responsible for providing information to the defendant about the company's solvency. The defendant must have reasonable grounds to believe the person is competent and reliable. [Schedule 1, items 48 and 49, subsection 588H(3), of the Corporations Act 2001]

2.99 The defence does not apply where the company entered external administration or ceased carrying on business altogether because of the disposition within 12 months of the disposition. [Schedule 1, item 50, subsection 588H(3A) of the Corporations Act 2001]

Reasonable steps defence

2.100 A defence is available for a civil penalty contravention to a person that takes all reasonable steps to prevent the company making the creditor-defeating disposition. This may include a non-executive director voting unsuccessfully against the disposition or, in the case of a company that is insolvent, attempting to place the company into administration or liquidation. [Schedule 1, items 45 and 53, subsections 588H(1) and (5) of the Corporations Act 2001]

2.101 The elaboration of this defence in subsection 588H(6) relates specifically to insolvent trading cases and does not necessarily apply to contraventions of the creditor-defeating disposition prohibitions. [Schedule 1, item 54, subsection 588H(6) of the Corporations Act 2001]

Illness or other good reason

2.102 A defence is available to a director for a civil penalty contravention if, for a good reason, the director did not take part in the management of the company at the relevant time. [Schedule 1, items 45 and 51, subsections 588H(1) and (4) of the Corporations Act 2001]

2.103 The primary scenario covered by this defence is illness where the director is temporarily absent from their duty to participate in the management of the company. Other examples are where an administrator or receiver has assumed control of the company's affairs.

2.104 The defence does not otherwise excuse the responsibility of a passive director to prevent the company making a creditor-defeating disposition. The defence does not displace the duty of every director to take an active part in the affairs of the company, and guide and monitor its management. This duty is implicit in the statutory duty of care and diligence.

Penalties

2.105 Penalties for a contravention of the new offence provisions are:

•

4,500 penalty units or three times the benefit obtained (and detriment avoided), or imprisonment for 10 years, or both (for an individual); and

•

45,000 penalty units or three times the benefit obtained (and detriment avoided) or 10 per cent of the annual turnover of the entity (for a body corporate).

[Schedule 1, item 102, Schedule 3 to the Corporations Act 2001]

2.106 Once a declaration has been made that a person has breached a civil penalty provision, ASIC can seek a pecuniary penalty order (section 1317G) or a disqualification order (section 206C) for individuals. The maximum pecuniary penalties are:

•

for an individual - 5,000 penalty units or three times the benefit obtained and detriment avoided; or

•

for a body corporate - 50,000 penalty units, three times the benefit derived and detriment avoided, or 10 per cent of the body corporate's annual turnover (up to 1 million penalty units).

[Schedule 1, item 100, subsection 1317E(3) of the Corporations Act 2001]

Compensation for breach of offence and civil penalty provisions

2.107 Amendments are made to Division 4 in Part 5.7B of the Corporations Act 2001 to allow liquidators - and in some cases creditors - to recover compensation from officers and facilitators who have contravened a creditor-defeating disposition offence or civil penalty provision.

2.108 Compensation may be sought against a person who has been found to have contravened a civil penalty provision or committed an offence in relation to a creditor-defeating disposition. Compensation is available for damage suffered by the company's creditors and may be awarded in the same proceedings that determined the offence or civil penalty. [Schedule 1, items 55 to 59, sections 588J and 588K of the Corporations Act 2001]

2.109 Compensation may also be sought against a person that has contravened an offence or civil penalty provision but has not been convicted or been subject to a civil penalty order. In these cases, proceedings must be brought within six years of the start of the company's winding up. [Schedule 1, item 60, subsection 588M(1A) of the Corporations Act 2001]

2.110 A declaration, conviction or finding made by a court in relation to a person's contravention of the offence or civil penalty provisions may be relied on in proceedings for compensation from the same person. [Schedule 1, item 64, subparagraphs 588Q(b)(iv) to (vi) of the Corporations Act 2001]

Preventing double recovery

2.111 Amendments are made to ensure creditors cannot obtain compensation to the extent compensation is obtained under another provision of the Corporations Act 2001 such as Part 5.8A. Part 5.8A protects employee entitlements and allows for compensation to be paid by persons who enter agreements or transactions to avoid companies paying employee entitlements. [Schedule 1, items 61, 62, 63,74, 97, 98 and 99, section 9 (definition of 'inked'), section 588N, subsection 596AC(10A), paragraph 596AD(b), and subparagraphs 596AF(3)(c)(iii) to (vi) of the Corporations Act 2001]

Proceedings by creditors for compensation

2.112 Creditors generally require the consent of a liquidator to bring their own proceedings for compensation. [Schedule 1, items 65 and 66, section 588R of the Corporations Act 2001]

2.113 A creditor may give a liquidator notice of their intention to bring proceedings and seek the liquidator's consent. This must be done at least six months after the winding up began. [Schedule 1, items 67 and 68, section 588S of the Corporations Act 2001]

2.114 The liquidator may refuse to grant the consent within three months of receiving the creditor's notice. The liquidator must provide a written statement of their reasons for the refusal.

2.115 After the end of the three-month period, the creditor may seek leave of a court to commence proceedings without the liquidator's consent. If the liquidator has provided a statement of reasons, the creditor must file the reasons with the court. [Schedule 1, item 69, subsection 588T(2) of the Corporations Act 2001]

2.116 In any event, a creditor cannot commence proceedings for compensation for a creditor-defeating disposition if:

•

the liquidator has sought a court order under section 588FF for the disposition;

•

ASIC has issued an order for the disposition;

•

the liquidator has applied to ASIC for an order in relation to the disposition; or

•

the liquidator has intervened in an application for a civil penalty order against a person for the disposition.

[Schedule 1, items 70 to 73, subsection 588U(1) of the Corporations Act 2001]

Technical and consequential amendments

Presumptions in civil proceedings

2.117 An amendment is made to allow a set of general presumptions to apply when ASIC considers making an order to recover property, and in court proceedings to set aside an ASIC order. This includes the existing presumption of insolvency and the new presumption of insufficient consideration where adequate financial records have not been maintained. [Schedule 1, item 7, subsection 588E(1) (paragraphs (aa) and (ab)of the definition of 'recovery proceeding') of the Corporations Act 2001]

2.118 Amendments are made to ensure findings made in one civil proceeding can be relied on in another civil proceeding where appropriate, including in relation to the new types of proceedings created in these amendments. These presumptions do not apply to criminal proceedings. [Schedule 1, items 12 to 16, paragraphs 588E(8)(a), (aa), (b), (da) and (8A)(a) of the Corporations Act 2001]

Commissioner of Taxation's indemnity

2.119 Section 588FGA grants the Commissioner of Taxation an indemnity against the directors of a company if a court makes an order under section 588FF against the Commissioner for the payment of certain tax liabilities by the company. An amendment is made to grant the same indemnity if an equivalent order is made by ASIC. [Schedule 1, items 26, subsection 588FGA(1) of the Corporations Act 2001]

2.120 Section 588FGB provides defences against an indemnity granted under section 588FGA. An amendment is made to align the expectation of solvency defence with the same defence that applies to contraventions of the creditor-defeating disposition civil penalty provision (see paragraph 2.96) in cases where the indemnity relates to a creditor-defeating disposition. [Schedule 1, items 27, subsection 588FGB(4A) of the Corporations Act 2001]

Other recovery provisions

2.121 Section 588FH allows a liquidator to recover from a related entity of a company a debt that the entity owed that is discharged because of certain voidable transactions of the company. A court must take any amount recovered under this section into account when making orders under section 588FF. An amendment is made to require ASIC to also take any recovery into account when making its orders. [Schedule 1, item 28 and 29, subsection 588FH(3) of the Corporations Act 2001]

2.122 Section 588FI prevents the double recovery of an unfair preference where the preferred creditor has put the company in the same position as if the unfair preference had not been entered into. Subsection 588FI(2) prevents a court from making an order under section 588FF prejudicing the right or interest of the creditor. An amendment is made to prevent ASIC from making a similar order. [Schedule 1, items 30 and 31, paragraph 588FI(1)(b) and subsection 588FI(2A) of the Corporations Act 2001]

Headings

2.123 The amendments in Schedule 1 add a number of new provisions to the existing insolvency law. To assist users of the law, a number of new headings are inserted for both the new provisions and for existing provisions. [Schedule 1, items 17, 18, 21 to 25, 32, 33, 45, 50 and 52, headings to Division 3, Subdivisions A, B, C, D and E in Division 2, and Subdivisions A, B and C in Division 3 of Part 5.7B, and the headings to subsections 588FG(1), (2), (7) 588H(1), (2), (4) and (5) of the Corporations Act 2001]

Technical amendments to National Innovation and Science Agenda reforms

2.124 Additional amendments are made to the National Innovation and Science Agenda reforms to ensure the safe harbour defence operates as intended in the context of these amendments in the Bill and the existing prohibition on insolvent trading.

2.125 As noted in paragraph 2.93, the safe harbour is not available to a person who fails to substantially comply with their obligations to assist a liquidator or controller in a formal insolvency. An equivalent obligation exists to assist a company administrator appointed to the company (subsection 438B). An amendment is made to prevent a person accessing the safe harbour where they have not complied with this additional obligation. [Schedule 1, item 41, paragraph 588GA(5)(a) of the Corporations Act 2001]

2.126 As noted in paragraph 2.94, subsections 588GB(1) and (2) prevent a director from relying on books or information as evidence for the application of the safe harbour where these materials have not been provided to a liquidator, administrator or controller as required.

2.127 Paragraph 588GB(2)(b) and subsection 588GB(5) currently refer to compliance with paragraph 429(2)(c). That paragraph requires the controller of a corporation to lodge and distribute copies of the information submitted by the corporation's officers. Compliance with this provision is beyond an officer's control and is not intended to affect an officer's reliance on books or information. An amendment is made to remove the reference to paragraph 429(2)(c). [Schedule 1, items 42 and 43, paragraph 588GB(2)(b) and subsection 588GB(5) of the Corporations Act 2001]

2.128 Further amendments are made to address issues arising following the implementation of the ipso facto reforms as part of the National Innovation and Science Agenda. Those reforms stay the enforcement of rights under a contract, arrangement or agreement on the occurrence of a 'trigger event' relating to a body making an application under section 411, the appointment or existence of a managing controller or the company's entry into administration under Part 5.3A. The purpose of the stay is to increase the chance that businesses will be able to successfully recover from financial difficulties.

2.129 The stay provisions will not apply to certain rights, including rights contained in contracts, arrangements or agreements prescribed by the regulations. The regulation-making power is expanded to permit the exclusion of types of rights (as well as kinds of contracts, agreements and arrangements) from the operation of the stay. [Schedule 1, items 4, 5 and 6, paragraphs 415D(6)(c), 434J(5)(c) and 451E(5)(c) of the Corporations Act 2001]

Statutory and judicial managers of prudentially regulated entities

2.130 Amendments are made to other legislation to ensure that statutory and judicial managers appointed to a prudentially regulated entity are not subject to the new offences and their transactions are not voidable. This is consistent with the exemption these managers have from the insolvent trading prohibition and existing categories of voidable transactions. [Schedule 1, items 79, 80, 93, 94, 95 and 96, subparagraph 14CA(b)(iv) and subsection 14C(3) of the Banking Act 1959, subparagraph 62ZOL(b)(iv) and subsections 62ZM(3) and 62ZOK(3) of the Insurance Act 1973, and paragraph 179AL(b)(iv) and subsections 179(3) and 179AK(3) of the Life Insurance Act 1995]

Amendments to the Aged Care (Accommodation Payment Security) Act 2006

2.131 The Aged Care (Accommodation Payment Security) Act 2006 enables the Government to pay an aged care resident an amount equal to certain liabilities (an outstanding accommodation payment balance) owed to them by an aged care provider that has suffered an insolvency event. Outstanding accommodation payment balance amounts effectively include amounts that have been paid by providers to residents but are recoverable by the company under certain provisions of Part 5.7B of the Corporations Act 2001 .

2.132 Amendments are made to the Aged Care (Accommodation Payment Security) Act 2006 to allow outstanding accommodation payment balances to include any amounts that are recoverable under the new voidable transaction provisions. [Schedule 1, items 75 to 78, subparagraphs 12(3)b)(i), 12(3)(b)(ii), 13A(3)(1)(i) and 13A(1)(d)(ii) of the Aged Care (Accommodation Payment Security) Act 2006]

Amendments to the Corporations (Aboriginal and Torres Strait Islander) Act 2006

2.133 The Corporations (Aboriginal and Torres Strait Islander) Act 2006 establishes the role of the Registrar of Indigenous Corporations and allows Aboriginal and Torres Strait Islander groups to form corporations. Sections 526-35 and 431-1 of the Act generally apply the provisions in Part 5.7B of the Corporations Act 2001 to Aboriginal and Torres Strait Islander corporations in a modified way.

2.134 The Act contains its own civil penalty provisions, which incorporate by reference the civil penalty provision that applies to insolvent trading under section 588G of the Corporations Act 2001 . An amendment is made to also allow the Act's civil penalty provisions to apply to contraventions of the new civil penalty provisions introduced by this Bill. [Schedule 1, item 81, paragraph 386-1(1)(d) of the Corporations (Aboriginal and Torres Strait Islander) Act 2006]

2.135 In the event of a conflict between the duty of a director to ensure an Aboriginal and Torres Strait Islander corporation complies with its Native Title legislation obligations and the director's duty under section 588G of the Corporations Act 2001 , the duty under section 588G prevails. Amendments are made so that a director's duty to prevent a company making a creditor-defeating disposition similarly prevails. [Schedule 1, items 82 to 92, sections 482-1 and 531-1 and 531-5, section 700-1 (definitions of 'Corporations Act insolvent trading and creditor-defeating disposition provisions' and 'Corporations Act insolvent trading provisions '), and the headings to Division 531 and Part 11-6, of the Corporations (Aboriginal and Torres Strait Islander) Act 2006]

Application provisions

2.136 The amendments in Schedule 1 to the Bill commence and apply from the day after Royal Assent. [Item 2 of the table in subclause 2(1) of the Bill]

2.137 The amendments to section 588H notionally affect the defences to the insolvent trading civil penalty provision. These amendments apply to debts incurred, and dispositions made, after commencement. [Schedule 2, item 4, subsection 1661(1) of the Corporations Act 2001]