As a specialist adviser of business turnaround strategies and corporate restructures for small to medium enterprise, the reforms proposed in the 2018-19 Budget to combat illegal phoenix activity are warmly welcomed by ReGroup Solutions.
It is our opinion that the proposed changes are ultimately positive and ReGroup Solutions are supportive of the overall objective of the proposed reforms.
In this article we consider the mounting risk for advisors through the proposed introduction of a new voidable transaction known as a Creditor-Defeating Disposition.
So What Is A Creditor-Defeating Disposition?
A Creditor-Defeating Disposition is a voidable transaction recoverable by a liquidator on application to ASIC or the Court. An officer or other person responsible for a company making a Creditor-Defeating Disposition may be subject to criminal charges, civil penalties and compensation orders.
It is significant to note that the proposed reforms extend potential liability to advisors who facilitate a transaction that is a Creditor-Defeating Disposition. This is a key change specifically targeted at advisors who facilitate illegal phoenixing.
Now, just because an asset is not available in the eventual winding up of a company does not mean that the disposal of the asset is a Creditor-Defeating Disposition.
The disposition of an asset is not voidable if the disposition:
- Was for market value consideration;
- Was made in connection with a course of action that satisfies the Safe Harbour in the corporations law;
- Was made under a deed of company arrangement or scheme of arrangement;
- Was made by the company’s liquidator.
Parts of the proposed reforms appear to be congruent with the National Innovation and Science Agenda to promote entrepreneurship and innovation and help reduce the stigma associated with business failure. This has been achieved by not impeding a director entering into transactions at fair market value and/or whilst the company was in Safe Harbour.
The key take out is that the proposed reforms will attempt to target those who either abuse the corporate form or assist others in the abuse of the corporate form. Anyone advising business owners on company transactions will need to be certain that their advice (or the implementation of their advice) will not result in an interpretation of being a creditor-defeating disposition, else, they may face personal liability.
The proposed reforms certainly solidify our existing view that transactions for less than market value can never be for the benefit of the company’s creditors and transactions at or above market value maximise the realisations for a company’s creditors and ultimately boost the economy by preserving employment and maintaining viable business models.
Turnaround Management
The typically client engagement with ReGroup Solutions sees us taking an advisory role for between 3 and 6 months which can generally be broken down into the following areas:
- Stakeholder Engagement
- Safe Harbour Assessment
- Restructure
- Renegotiate
- Recapitalise
- Retain
Our experience is that small to medium enterprise in financial difficulty require both a financial restructure and a concurrent operational restructure to strategically manage a better outcome for stakeholders.
A correctly managed corporate restructure will provide a better outcome than immediate liquidation and see the business continue to operate as a going concern giving it the opportunity to make the necessary changes and align to a growth trajectory.
Needless to say these transactions require a significant amount of advice and guidance. With the proposed Creditor-Defeating Disposition penalties (civil and criminal) that target advisors who facilitate illegal phoenix transactions anyone advising a business owner in financial distress must be confident any advice given aligns with the proposed reforms.
If you would like to discuss the proposed reforms or how it may relate to your clients please don’t hesitate to contact ReGroup Solutions.
Michael Durbridge & Ben Heaney