The Australian Law Reform Commission has released a Discussion Paper addressing a number of aspects of its reference on corporate criminal liability.
Phoenix activity receives attention.
Other issues are the division between criminal offences and civil penalty provisions; the method for attributing criminal liability to corporations; individual liability for corporate offences; deferred prosecution agreements; and penalties and the sentencing process.
Illegal phoenix activity
The ALRC has raised concerns about the constitutional validity of powers proposed for ASIC under the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, presently before parliament.
Section 588FGAA would give ASIC the power to make ‘administrative’ orders to direct a person to transfer to the company property or money that was the subject of a creditor-defeating disposition that in ASIC’s opinion, fairly represents the application of proceeds of property that was the subject of the disposition.
But ASIC must not make such an order if it has reason to believe that, if it were a court, section 588FG would prevent it from making a corresponding order under section 588FF.
As the ALRC says, “this is potentially problematic as it requires ASIC to place itself in the position of a court” and may confer judicial power on ASIC and therefore be unconstitutional.
In comparison, the long-time existing precedent in s 139ZQ of the Bankruptcy Act, which serves the same purpose, does not confer judicial power on the Official Receiver as the provision provides for de novo review of the decision. Proposed s 588FGAE(3) appears to provide for a narrower right of review.
Professor Jason Harris had earlier raised concern about this new power, saying that
“Directing ASIC to place itself in the position of a court is objectionable on policy grounds as well as on constitutional grounds. ASIC should not be assuming the role of the court, nor should it be punishing persons for receiving property subject to a voidable transaction, particularly where no court determination has yet been made. The order is made based purely on “ASIC believing that the disposition is voidable”.
The ALRC has put up its own ideas for the provision needed, with rights given to the person served with an ASIC order to object.
We don’t know why Treasury and parliament did not follow the s 139ZQ bankruptcy precedent. Apart from other things, to go off on a different tangent is contrary to recent progress in harmonising the laws of personal and corporate insolvency in Australia.
A specific phoenixing offence
The ALRC comes out in favour of creating a specific phoenixing offence, contrary to respected views to the contrary. Its reasons are based on behaviour rather than black letter law. The ALRC says that
“By specifically prohibiting illegal phoenixing, the Government may … increase commitment to compliance by influencing behavioural norms. In the ALRC’s assessment, the expressive role of a prohibition should not be underestimated. … new laws would send a message to ASIC that enforcement in the area of illegal phoenix activity is important and will achieve significant and beneficial outcomes’.
There is some force in those arguments, although the fluid nature of phoenix activity might be difficult to define and capture.
Phoenix misconduct may be committed on unlawful advice to remove assets out of the reach of creditors and start afresh – or as one adviser said, consideration should be given “to re-locating yourselves and to a large extent new identities will be needed to be assumed, as if you do not, your whereabouts could be traced …”: Re Covino  FCA 231.
The ALRC acknowledges that imposing a licensing or regulatory scheme upon unregulated pre-insolvency advisers may be difficult, given the multiple types of professionals acting in this space, many giving good quality advice. One question the ALRC asks – and there is a ready answer – is whether the law should prohibit the provision of insolvency advice without a licence?
Submissions on the Discussion Paper are due by 31 January 2020. The ALRC is due to report on 30 April 2020.
See Corporate Criminal Responsibility, Discussion Paper 87, November 2019: www.alrc.gov.au