Risk of Liability for Advisors

In past years, advisors ran little risk of liability. However, a law passed in February 2020 called Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth).

The law introduces the concept of a ‘creditor-defeating disposition’, being: “A disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up.”

So basically, removing an asset from a company at less than market value (or no value).

The law introduces criminal penalties for a company officer who undertakes such a disposition, or anyone who is found to be procuring, inciting, inducing, or encouraging such a disposition, and the disposition was made in a manner that is seen to be “reckless to harm”.

If the transaction does not meet the level of “reckless to harm”, civil penalties can still apply.

The “or anyone” part of the law is probably targeted at pre insolvency advisors, and liquidators to a lesser degree, but as it says, it could be any type of advisor.

ASIC Prosecution of Advisors

There have been a couple of actions against pre insolvency advisors and lawyers found to be complicit with Corporations Act breaches in the last couple of years, but nothing yet under these new elevated powers.
The new powers came in right around the start of the COVID-19 pandemic so it may be that once the effect of that subsides, we see more activity in this area.

Protecting Your Fees

If you are doing work in the lead up to a liquidation, there is a danger your fees could be seen as a preferential payment and overturned in the liquidation process. A simple trick to avoid this is to ask to be paid for your work in advance. Payments received in advance cannot be classified as preferential.