ASIC announces its surveillance is targeting illegal Phoenixing activity

Wednesday 11 September 2013 @ 10.48 a.m. | Corporate & Regulatory | Trade & Commerce

In a media releases posted to its website on Monday (9 September 2013) the Australian Securities and Industries Commission (ASIC) has announced that its is targeting company directors who have a history of failed companies as part of its surveillance program to combat Phoenixing activity. This is the second such announcement form ASIC and is part of a continuing program against such activity initiated by the passing of legislation amending the corporations law in 2012, namely, the Corporations Amendment (Phoenixing and Other Measures) Act 2012 (No. 48 of 2012) (the 2012 Act).

What is Phoenixing activity?

It is described in the ASIC media release as "the fraudulent act of transferring the assets of an indebted company into a new company to avoid paying creditors, tax or employee entitlements". New companies created in this way are usually operated by the same director and continue to do business under a new structure to avoid their responsibilities to their creditors and/or former employees.

To address this issue the 2012 Act:

  • introduced an administrative process for compulsory external administration to facilitate payment of employee entitlements where a company has been abandoned;
  • included a regulation making power to prescribe methods of publication of notices relating to events before, during and after the external administration of a company;
  • as well making other minor and technical amendments.

Background to ASIC's action

In its media release ASIC indicates that they are acting as part of a whole of government initiative designed to to regulate illegal Phoenixing activity and that it is a member of the Inter-Agency Phoenix Forum comprising 13 Commonwealth government agencies which include the Australian Taxation Office, Australian Crime Commission and Fair Work Ombudsman. In addition ASIC advises that its current work also includes conducting reviews of certain liquidator appointments which exhibit the signs of illegal Phoenixing activity and the funding liquidators from the Assetless Administration Fund to investigate potential illegal Phoenixing activity.

Quoting research compiled for the Fair Work Ombudsman by PriceWaterhouseCoopers in 2012, ASIC's media release reports that the cost of Phoenixing activity to the Australian economy is more than $3 billion annually. ASIC Commissioner Greg Tanzer is quoted as saying:

"Illegal phoenix activity has far reaching and unfair consequences,  
.  .  . Employees are robbed of wages and entitlements and creditors – many of whom are small businesses – are left behind with a pile of debts. There are also significant unpaid tax liabilities which have a detrimental impact on tax revenue."

Common indications of Phoenixing activity

ASIC says in its media release that Phoenixing activity may be present where:

  • The company fails and is unable to pay its debts.
  • Directors act in a manner which intentionally denies unsecured creditors equal access to the company’s assets in order to meet unpaid debts.
  • Soon after the failure of the initial company (usually within 12 months), a new company commences using some or all of the assets of the former business, and is controlled by parties related to either the management or directors of the previous entity.

Measures used to combat Phoenixing activity

ASIC says that its action to combat phoenix activities will include removing directors who have been involved in two or more failed companies from the industry and that it will focus on the building and construction, labour hire, transport, and security and cleaning industries . . . "looking at failed companies, mostly within the small business sector, from July 2011 onwards where there have been allegations of illegal Phoenixing . . ." At this stage ASIC says it has identified a target group 1,400 companies and that it is now paying "special attention" to approximately 2,500 individuals who were directors at the time these companies failed or ceased being directors shortly before the companies were wound up.

TimeBase is an independent, privately owned Australian legal publisher specialising in the online delivery of accurate, comprehensive and innovative legislation research tools including LawOne and unique Point-in-Time Products.

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