Phoenixing: Less cool then it sounds.
Well a Federal election has been called which means that parliamentary bills lapse as a result (although many will be brought back). But one in particular I have been following with keen interest. The Treasury Laws Amendment (Combating Illegal
) Bill 2019 looks set to shake things up in the corporate world. As some of you may know I used to work at ASIC. I could not count the number of times I saw Phoenix companies spring up.
A ‘phoenix company’ is a company that springs from the ashes of a liquidated company, usually with the same business collateral, look and feel at the same premises and with a very similar name. It is a way for a director to save the business without paying creditors the money they are owed. Usually the director has illegally transferred property to the new entity which should rightly be liquidated in the existing corporate entity.
The Amendment Bill introduces a new concept of a ‘creditor defeating disposition’. This is defined as a transaction less than market value with the effect of preventing the property becoming available to the benefit of creditors in the winding up of the company. Such transactions are voidable under the new Bill. The Bill also plugs a number of other gaps in the existing law in relation to directors resigning to avoid liability for phoenix transactions, strengthening regulator powers, and making lawyers and other advisers that assist in phoenix activity personally liable.
In other news, Farrell J has proved that if you p--s off a judge by not showing up to court they may very well liquidate your company. In Beattie v Gray, in the matter of Control Rail Pty Limited (in liq) (No 2)  FCA 433 were successful in obtaining summary judgment for insolvent trading by the sole director. Despite some who believe that Australia’s insolvent trading laws are the strictest in the world, in reality insolvent trading is notoriously hard to prove. Since ASIC v Plymin there seems broad consensus that insolvency is assessed on a cash flow basis rather than a balance sheet test though the balance sheets are of course helpful in proving insolvency. But assessing cash flow can be extremely difficult when the director has not kept adequate books and records. Directors are often able to furnish ‘proof’ of a mysterious payment they were going to receive right when the company incurred its debts.
In Beattie, the company did not satisfy a balance sheet test in that the bank statements showed it had a maximum overdrawn balance of $4,539 on 27 November 2015 at a time when it owed the ATO $282,088.40. After a search warrant executed on its storage facility in blacktown, a small meagre collection of documents were seized that were plainly inadequate to constitute financial records under s286 of the Corporations Act. This justified an inference under s588E (3) (b) that the company was insolvent during the period the inadequate books and records covered.
But it was the directors failure to attend court on multiple occasions that his honour gave the most weight to. The director could have appeared and even possibly argued some of the statutory safe harbour defences to insolvent trading, but instead he chose not to appear on multiple occasions even after being convicted for failing to appear to provide a report as to affairs to the liquidator. Farrell J was satisfied that the director had reasonable grounds for suspecting the company was insolvent and should not have incurred the $300,000 debt.
And so it was that the garbage collectors of Worth Recycling, the company that commenced wind up proceedings, had their revenge.