Strict new anti-phoenix measures to take effect today

Earlier this year, the senate passed the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 through parliament.  The Bill, which was originally introduced in February 2019, and reintroduced in July 2019, presents new measures to combat Australia’s increasing illegal phoenix activity. In doing so, it amended the Corporations Act 2001, A New Tax System (Goods and Services) Act 1999 and the Taxation Administration Act 1953 from 1 April 2020.

Phoenix activity occurs where a new company is created to continue the business of an existing company. Typically, this will involve a company entering into a transaction with another related entity for the sale of its assets. This allows the business to continue, however the new company will not have any of the liabilities that the original business had, such as obligations to creditors, the ATO or employees. This activity becomes illegal where the old company is placed in liquidation after all assets have been transferred.

In seeking to curb this illegal activity, the Bill has introduced the following measures:

Creditor-defeating disposition

The Bill introduces new offences for creditor-defeating disposition. In doing so, it provides that a creditor-defeating disposition will be made out where:

  1. The consideration paid to the company for the relevant property was less than the lesser of:
    • The market value of the property; or
    • The best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time.

2. The disposition has the effect of preventing the property from becoming available for the benefit of the company’s creditors in the winding-up of the company; or hindering, or significantly delaying that process.

Further, the Bill introduces criminal and civil penalties for company officers that fail to prevent the company from making creditor-defeating dispositions, or other persons that facilitate creditor defeating dispositions.

ASIC permitted to recover company property

ASIC will be entitled to order a person to:

  1. return to the company for distribution among creditors, any property that was transferred subsequent to the initial creditor-defeating disposition;
  2. Pay an amount equal to the benefit the person received from the creditor-defeating disposition;
  3. Transfer property that was purchased with the proceeds of sale of a creditor-defeating disposition.

Limitations on Director resignations

Directors will be prohibited from backdating resignations or ceasing to be a director if this would leave the company with no directors.

GST Liabilities

Under the A New Tax System (Goods and Services Tax) Act 1999 and Taxation Administration Act 1953, from 1 April 2020, the Commissioner of Taxation will be entitled to collect estimates of anticipated GST liabilities. Company directors may also be made personally liable for their company’s unpaid GST, Luxury Car Tax and Wine Equalisation Tax liabilities in certain circumstances.

 Tax Refunds

The Bill will amend the Taxation Administration Act 1953 to enable the ATO to retain tax refunds where a taxpayer has failed to lodge a return or failed to provide other information that might affect the amount of a refund.

In delivering his second reading speech to Parliament, the Honourable Michael Sukkar, Assistant Treasurer and Minister for Housing, asserted that “this bill will give our regulators additional enforcement and regulatory tools to better detect and address illegal phoenix activity and, importantly, to prosecute or penalise directors and others who facilitate this illegal activity, such as unscrupulous pre-insolvency advisors.”

Do Australia’s bankruptcy laws breach its freedom of movement obligations?

In 1972, Australia signed the United Nations International Covenant on Civil and Political Rights (ICCPR), before ratifying the Convention in 1980. In doing so, the nation agreed, among other commitments, to uphold Article 12 which codifies the freedom of movement. However, Australian bankruptcy law continues to provide that limitations may be imposed on a bankrupt’s international travel, with scholars and bankrupts alike asserting that such restrictions are too harsh and constitute a breach of Australia’s obligations under international law.

Australian bankruptcy law provides that a bankrupt’s international travel is at the discretion of the trustee of their bankruptcy. Section 77 of the Bankruptcy Act provides that a bankrupt must surrender their passport to the trustee, whilst section 272 requires that a bankrupt seek their trustee’s approval before leaving the country. The law was not designed as a punitive measure, but rather to facilitate the efficient administration of a bankrupt’s estate. This rationale was predicated on the basis that proper administration of an estate requires the bankrupt to be physically present in Australia, and that by seizing their passport, the bankrupt will be unable to flee.

Relevantly, in Re Tyndall, the court noted that:

“Restrictions upon such travel under the bankruptcy legislation must be seen as being aimed at ensuring the proper administration of the bankruptcy laws and of bankrupt estates under such laws and not as a penalty imposed upon a citizen as a consequence of inability to pay debts leading to the making of a sequestration order.”

In Weiss v Official Trustee in Bankruptcy the court said at 43:

“I am conscious of the fact that the evidence revealed in [the bankrupt's] public examination suggests that [the bankrupt] has committed various offences against the Bankruptcy Act 1966 (Cth) which have characteristics involving nondisclosure and concealment. However, these are matters to be litigated at the proper time. It is a basic principle that a resident of Australia is entitled to expect that he may travel freely notwithstanding the fact that he is a bankrupt provided it will not lead to his staying overseas in order to defeat or delay his creditors and provided it will not interfere with the due administration of his bankrupt estate (see Tyndall's case at 15). It is to secure the proper administration of bankrupt estates that bankrupts are required by the Bankruptcy Act 1966 (Cth) to give their passports to the trustee (par. 77(a)) and to obtain the permission of the trustee before travelling overseas (par. 272(c)). This interference with the travel of bankrupts is not for the purpose of punishing or expressing disapproval of them for offences or alleged offences against the Bankruptcy Act 1966 (Cth).”

The considerations Australian Courts often deliberate, although not exclusive, are:

  1. Is the proposed visit genuine?
  2. Is the bankrupt likely to return to Australia as promised?
  3. Will the visit hamper the administration of the estate?

Meanwhile, Article 12 of the ICCPR provides that everyone shall be free to leave any country, including their own, except where restrictions are necessary to “protect national security, public order, public health or morals or the rights and freedoms of others.

In Re Tinkler, Nicholas J recognised that “a trustee’s decision to refuse a bankrupt permission to travel overseas is in a special category because it affects the freedom of movement of a person who may not have committed or been charged with any offence.” Further, in Re Hicks, the court noted that a trustee’s power to restrict travel can significantly affect the bankrupt’s freedom.

Accordingly, in its 2015 Report on Traditional Rights and Freedoms – Encroachments by Commonwealth Laws, the Australian Law Reform Commission called for review of section 77, asserting that the requirement ‘may not be a proportionate response to concerns about bankrupt individuals absconding.’ In doing so, it posited that travel restrictions should only be imposed subject to ‘precise criteria and judicial oversight’.

In reaching this conclusion, the ALRC relied on submissions made by Associate Professor Christopher Symes who argued that the requirement for bankrupts to surrender their passport fails to reflect the reality of the modern era. Namely, it is common for people to frequently travel internationally, and enhanced technological affordances make international communication a seamless process, rendering it possible for estates to be effectively administered even where bankrupts are not physically present in Australia.

Despite this, the Australian Government has not taken steps to adopt the ALRC’s recommendation.

On one view, the law appears to need reform but equally, Australia should be permitted to regulate these issues to protect the legal rights of various parties. Finding the right balance is the key. However, the issue is complex as while the existing model fails to accommodate commercial reality, it would also be impractical to require a court to hear an application every time one of Australia’s 15,000+ bankrupts wishes to travel abroad.

Ultimately, while no definitive solution is apparent, it is worth noting that directors of insolvent Australian companies are not subject to the same limitations as personal bankrupts. Further, in no comparable jurisdiction, including the UK, USA, Canada, New Zealand, South Africa, Malaysia, Singapore, India or Ireland, is forfeiture required. As such, there is merit to the argument that bankrupt estates can be effectively administered without unduly restricting travel.

So, should the process be flipped on its head whereby Australian bankrupts are not required to surrender their passports to the trustee and free to travel as they wish? On one view the answer is yes and this could be achieved by reforming the existing practice by transferring the burden onto the bankruptcy trustee to object to travel in any event, rather than requiring the bankrupt to seek permission in the first place.

Any time a bankrupt has sought to rely on the ICCPR in supporting an application for travel, it has been held that Australia’s international agreements have no direct legal effect on domestic law as the provisions have not been incorporated in domestic legislation. Perhaps it is time that Australia updates its bankruptcy laws to not only reflect current times, but to simultaneously uphold its international human rights obligations.