Australia - Is This The Death Of Pre-Packs? – Anti-Phoenixing Bill Rises Again.
Legal News & Analysis - Asia Pacific - Australia - Insolvency & Restructuring
6 August, 2019
The Treasury Laws Amendment (Combatting a Legal Phoenixing) Bill 2019 was reintroduced into the Commonwealth Parliament on 4 July last. It appears to be in the same terms as the earlier Bill which lapsed when the Parliament was prorogued prior to the recent Federal Election. It introduces a new insolvency concept. Risks arise for those involved in legitimate restructurings. Even constitutional issues arise.
Object of the Bill
The object of the provisions in the Bill “is to deter the practice (which may form part of the activity sometimes called phoenixing) of disposing of a company’s assets to avoid the company’s obligations to its creditors”; s. 588GAA.
If the Bill is enacted, corporate insolvency law will be invested with another legislative curiosity; the creditor-defeating disposition.
That is a transaction which involves:
- a disposition of the company’s property;
- for a consideration which was less than both:
- the market value of the property; and
- the best price which was reasonably obtainable for the property, having regard to the circumstances existing at the time of its disposition;
- the disposition having the effect of preventing or delaying the property becoming available to satisfy the claims of the company’s creditors;
- the disposition, in effect, taking place within the 12 months preceding the relation-back day for the company’s liquidation; and
- the disposition not being undertaken in the course of some formal insolvency administration of the company which preceded its liquidation; ss. 588FDB and 588FE(6A).
There is no legislative guidance as to how either the market value of the property or the best price which is reasonably obtainable for it might be determined. Will it be possible, e.g., for the directors of the company to rely on a valuation or, rather, will they need to submit the property to auction as seems to be the case with the process-obsessed decisions concerning the operation of s.420A; Corporations Act (the provision regulating the exercise by receivers of their powers of sale)? It would be useful if the Bill could be amended to include such guidance.
Beyond that, it would seem that a creditor-defeating disposition need not involve the whole of a company’s property. So, take the example of a retailer in financial difficulty, the proposed legislation could apply to a “stock-take sale” which was intended to augment the company’s cashflow.
Duty to Prevent Creditor-Defeating Dispositions
The effect of the proposed legislation will be achieved by imposing a duty on officers of a company to prevent creditor-defeating dispositions at a time when, to put it in a shorthand way, the company is insolvent.; s. 588GAB
In this way, at least, the Bill mirrors the insolvent trading provisions in the Corporations Act.
Procuring Creditor-Defeating Dispositions
Additionally to the duty imposed upon officers to prevent creditor-defeating dispositions, the proposed legislation will prohibit a person from engaging in the “conduct of procuring, inciting, inducing or encouraging the making by a company“ of a creditor-defeating disposition; s. 588GAC.
This provision will have particular implications for Chief Restructuring Officers and other professionals who are involved in advising companies in financial distress. Take the example already given of a retailer undertaking a stocktake sale. If that sale was held on the basis of advice from a consultant as to possible courses of action which might be available to relieve the company’s cashflow difficulties, the consultant, prospectively at least, would be exposed to a claim for liability on account of a breach of that provision.
Defences to Claims for Breach of Duty, including Safe Harbour Defence
Both officers of companies and their advisors would only be liable for a breach of duty if “[they] know, or a reasonable person in [their] position would know, that the disposition is a creditor-defeating disposition.”; ss. 588GAB and 588GAC.
Accordingly, evidence which rebuts either of those circumstances will be a defence.
Additionally, as with claims for insolvent trading, the safe harbour defence is available for a claim against either an officer of a company or one of the company’s advisors that a disposition is a creditor-defeating disposition. That defence is to this effect:
“[the provisions imposing a liability for creditor-defeating dispositions] do not apply in relation to a person and a creditor-defeating disposition if:
at a particular time after the person starts to suspect the company may become or be insolvent, the person starts developing one or more courses of action that is reasonably likely to lead to a better outcome for the company; and
the creditor-defeating disposition is undertaken directly or indirectly in connection with any such course of action…”; ss 588H(1) and 588H(2 (as amended))
To return again to the example of the stocktake sale, if it was held as part of a more general restructuring plan which “was reasonably likely to lead to lead to a better outcome for the company”, the safe harbour defence may be available to both the officers of the company and its advisors.
The availability of the safe harbour defence also raises interesting possibilities for pre-packs. Take by way of further example, a company whose business would be seriously damaged and devalued if it were to undertake a formal insolvency administration.
Such a circumstance may sustain a conclusion that a pre-pack sale for a consideration which reflected the market value of the business as determined by an independent valuer would produce a better outcome for the company. That conclusion would involve a comparison between the independent valuation and an assessment of the price which could be obtained for the company’s business if its sale was deferred until after it entered some formal administration and the sale process was left to the administrator.
Enforcement of Claims
In addition to seeking relief by way of an application to the Court, the Bill, if enacted, will empower ASIC, on the request of the company’s liquidator, to make orders, including:
- an order directing… the transfer to the company of the property that was the subject of the disposition; or
an order requiring the payment to the company of an amount that, in ASIC’s opinion, fairly represents some or all of the benefits received because of the disposition.”;s. 588FGAA.
This would seem to be a legislative attempt to confer on a regulator powers which, at the least, are quasi-judicial in nature.
It will be interesting to see if, ultimately, such a provision survives a challenge in the High Court based on the ground that the provision involves an impermissible conferring of the Commonwealth’s judicial power on the executive arm of the Government.
The proposed legislation will provide a further and more substantial basis for pursuing claims against both a company’s officers and its advisors to recover the proceeds of phoenixing transactions. Equally, although incompletely, the legislation will provide some further guidance as to the circumstances in which a company’s business or, at least, some of its assets can be arranged to be sold prior to some formal insolvency administration.
For further information, please contact:
Richard Fisher, Ashurst