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Criminal and civil penalties for creditor-defeating dispositions: Illegal Phoenixing Amendments 2020 #6

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

As discussed in previous blogs in this series, both directors and external advisers have a duty to prevent creditor-defeating dispositions. Not only are they potentially liable for compensation, additionally they are liable for fines as well as it being a criminal offence. An offence could result in a maximum prison sentence of up to 10 years. The intention element is satisfied if a person has knowledge, intention or recklessness of the disposition being a creditor-defeating disposition.

The potential fines for a breach of the section can be severe. For individuals, the pecuniary penalty applicable is the greater of either 5,000 penalty units ($1.05m) or three times any benefit derived or detriment avoided because of the contravention.

For corporate bodies, the pecuniary penalty applicable is the greater of either:

  1. 50,000 penalty units ($10.5m);
  2. Three times any benefit derived or detriment avoided because of the contravention; or
  3. Continue reading…

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Defences to Creditor-Defeating Dispositions: Illegal Phoenixing Amendments 2020 #5

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

In our last two blogs we discussed the liability on directors and third party facilitators for failing to prevent creditor-defeating dispositions. We now discuss the defences that may be available to directors and third party facilitators who would otherwise be liable.

Extension of market value

As mentioned in our previous blogs, the definition of ‘market value’ is extended to include the concept of the ‘best price reasonably obtainable’. The objective is to take into account circumstances where a company has an urgent need of cash-flow and may not be in a position to sell its assets at the market price, such as that deemed by a qualified valuer. If a company considers it is forced to sell off an asset which may be at a price less than real market value, due to time constraints in needing to realise cash, companies and advisers should consider making careful records evidencing the steps taken to attempt to realise it for as much of its market value as possible. This should include the circumstances the company was in requiring it to sell the asset potentially at under value.
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COVID-19 –What Debt will Scuttle Passage to the New Safe Harbours?

By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group.

Amendments in March of this year have brought about changes to the Corporations Act 2001 which allow for an additional temporary safe harbour to protect directors from insolvent trading, –  see our blog here.

However, companies do not automatically qualify for the protection. To qualify, the debt must be incurred as follows:

  • In the ordinary course of the company’s business;
  • During the six month period starting from the date the new law commenced (being 24 March 2020); and
  • Before any appointment of an administrator or liquidator.

The evidentiary burden of proof is on the person seeking to rely on the safe harbour relief, which means that it will be up to directors to make sure they obtain and keep evidence that their debt meets the criteria.

According to the explanatory memorandum in respect of the amending legislation, a director will be taken to have incurred a debt in the ordinary course of business if the debt “is necessary to facilitate the continuation of the business during the six month period that begins on commencement of the subparagraph”. This is narrower than the criteria for the existing safe harbour provisions, which focus on debts incurred in the pursuit of a course of action likely to lead to a better outcome for the company than liquidation. The Explanatory Memorandum gives the following examples for debts incurred in the ordinary course of business:
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COVID-19: Will my hearing go ahead? – Part 3

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

This is part 3 of our series on what will constitute valid grounds for an adjournment of a pending hearing, due to COVID-19 and the global coronavirus pandemic.

In Talent v Official Trustee in Bankruptcy & Anor (No 5) [2020] ACTSC 64 the Plaintiff sought an adjournment of the trial hearing, arguing that he was an ‘at risk’ person because he suffered from leukaemia. Doctors had recommended that he remain isolated.

Submissions were made about the Plaintiff’s legal team being at risk, as well as the Defendant’s senior counsel withdrawing because she was at risk and could not fly down for the hearing. However, those matters were expressly not considered.

The court did consider that a lot of the hearing could be conducted from a remote location. However, on balance the Court granted the adjournment application, based on the Plaintiff’s right to observe the hearing and the need to provide prompt instructions. The Court drew a distinction between final hearings and other court procedures:
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COVID-19 and Corporate Insolvency: What does an increase in corporate insolvency mean to creditors?

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

In these difficult times, recent legislative amendments provide assistance for debtors, but risk for creditors. Going forward, it will be important for creditors to carefully monitor their credit policies. Creditors are likely see more spikes in default rates over the next months while government restrictions and businesses’ staff isolation plans remain in place. Where a debtor is placed into external administration, they should be aware of their rights (and duties) during the insolvency process.

Creditors should take note of the changes to the bankruptcy and insolvency regimes designed to protect debtors during the coronavirus period. The changes will limit options to creditors in respect of certain enforcement action. They include:

  1. An increase in the threshold for issuing statutory demands from $2,000 to $20,000;
  2. An increase in the threshold for issuing bankruptcy notices from $5,000 to $20,000;
  3. Continue reading…

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Third Party Facilitators and Pre-Insolvency Advisers: Illegal Phoenixing Amendments 2020 #4

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

In our last blog we discussed some of the implications of the new legislation designed to prevent ‘creditor-defeating dispositions’.

In addition to it being it being a voidable transaction, the new legislation puts a duty on the company’s director to prevent the company from entering into a creditor-defeating disposition. Section 588GAB of the Corporations Act 2001 (Cth) creates a personal liability on directors for damages and pecuniary fines, as well as being a criminal offence. In respect of pre-insolvency advisers, section 588GAC is a similar provision applying to any third party who ‘procures, incites, induces or encourages’ a company to make a creditor-defeating disposition of property. The explanatory memorandum states:

“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.”

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COVID-19 Credit Crisis – Where can Accountants and Advisors Turn for Help?

By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group.

Accountants and financial advisors are the first port of call in a financial storm. Never is that need more prevalent than now, during the COVID-19 pandemic.

Among other things, accountants and financial advisors should be able to consider discussing the following options with their clients:

  • Voluntary administration – especially the option for the statutory moratoriums gained by voluntary administration;
  • Deeds of Company Arrangement (DOCA) – including Holding DOCAs which have been recently upheld by the High Court – see here;
  • The existing Safe Harbour provisions – see here;
  • The new COVID-19 protections against insolvent trading – see our blog here;
  • Informal restructuring of companies and business (making sure you avoid the anti-phoenixing legislation – see our blogs here); and
  • If all else fails, promptly appointing a suitable qualified liquidator to wind up the company.

Accountants and advisors should advise clients early in respect of these matters. Time is critical and the stakes are high – both for advisors and directors – and advisors must be prudent in advising their clients who appear to have long term issues with solvency; it is better to speak with a specialist now for restructuring advice, rather than later. This will ensure that when things do improve, they will be in a better position to take advantage of the situation.
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COVID-19 and Corporate Insolvency: New tax legislation directors need to know

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

In the light of the COVID-19 outbreak, the Federal Government has acted to ameliorate some risks to directors. This includes recently introduced risks to directors.  Directors should be aware of new amendments to the Taxation Administration Act 1953 (Cth) (“the TAA”). The amendments include:

  1. New rules about post-dating ASIC notification of a director resignation;
  2. An estimates regime for GST payments;
  3. Application of the Director Penalty Notice (“DPN”) regime to account for the estimates regime for GST payments; and
  4. Retention of tax refunds for failing to comply with obligations.

Director Resignations

These new rules provide that any notification of a director resignation lodged with ASIC 28 days after the resignation date will only be effective from date of notification. This means that even if a director resigned several years ago, he or she will remain a director (with all of the liabilities associated with such appointment) until their resignation is lodged with ASIC. Therefore, directors who resign should ensure that they lodge a Form 370 with ASIC as soon as possible. If they fail to notify ASIC within 28 days, they may find themselves liable in respect of any non-compliance by the remaining directors.
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