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  • The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) has introduced a number of new provisions which aim to prevent illegal phoenixing activity.
  • The aim of the legislation is to prevent creditors from being left behind to deal with a shell company without any assets to satisfy its debts.
  • New provisions introduced into the Corporations Act aim to make directors more accountable by preventing directors from resigning where their resignation would mean that the company has no directors.

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (the ‘Act’) came into force on 18 February 2020.

The purpose of the Act is to:

  • combat illegal phoenix activity; and
  • improve the accountability of resigning directors.

Three years since the Act came into force, we revisit the changes to see what impact they have had and provide an update on their effectiveness. The introduction of the Act coincided with the Covid-19 pandemic and the impact of these changes on illegal phoenix activity is yet to be fully tested. However, given current economic conditions, combined with the effects of the pandemic on businesses, we expect these reforms to become increasingly important. It remains to be seen whether the reforms will be impacted by the Parliamentary Joint Committee’s inquiry into Australia’s corporate insolvency law, which is due to provide its first report to the Senate on 30 May 2023.

Phoenix activity typically involves:

  • the creation of a new company, with similar (if not identical) characteristics, assets and business operations;
  • the transfer of assets from the original company at no value or substantial under value; and
  • the original creditors having no assets to claim against.

The Act was primarily designed to prevent creditors from being left behind in the shell company without recourse to any assets.

The Act has made it an offence to engage in conduct described as a ‘creditor defeating disposition’, namely the disposition of company property that removes assets from creditors reach for less than its market value. The Act also targeted fleeing directors who left the company behind, by making it illegal for them to resign when there was no replacement director in place.

As if proving the point of the intervening events, to date, only two cases have considered the provisions of the Act. Further, it is not apparent whether ASIC has availed itself of its new powers (and the new civil penalty provision contained in section 588GAC of the Corporations Act 2001 (Cth)) (‘Corporations Act’).

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