The Senate Economic Reference Committee (SERC) began its review into insolvency in the Australian construction industry at the end of December 2014. In the recent public hearings, the issue of phoenix companies was part of the discussion, and the impact their fraudulent behaviour has on the construction industry and on corporations and company tax as a whole.
Illegal phoenix activity involves the intentional transfer of assets from an indebted
company to a new company to avoid paying creditors, tax or employee entitlements. The
directors leave the debts with the old company, often placing that company into administration
or liquidation, leaving no assets to pay creditors.
Meanwhile, a new company, often operated by the same directors and in the same industry as the old company, continues the business under a new structure. By engaging in this illegal practice, the directors avoid paying debts that are owed to creditors, employees and statutory bodies (e.g. the ATO). Illegal phoenix activity is a serious crime and may result in company officers (directors and secretaries) being imprisoned.
Not all company failures will involve illegal phoenix activity. Genuine company failures do occur. Where a business has been responsibly managed, but fails, that business may continue after liquidation by using another corporate entity without, necessarily, being involved in illegal phoenix activity.
Illegal phoenix activity, on the other hand, typically involves those in control of companies, such as directors or former directors, deliberately avoiding liabilities by shutting down the original indebted company (e.g. by placing it into liquidation), transferring some or all of the assets to another company and then using that company to conduct the same type of business. The key characteristics are:
the company fails and is unable to pay its debts
the company acts in a manner that intentionally denies unsecured creditors equal access to the company's assets to meet and pay debts
soon after the failure of the initial company (usually within 12 months), a new company commences which may use 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 company.
People associated with the construction industry warn that when the incidence of illegal phoenix activity reaches a critical point, other companies in the industry will face a difficult choice between succumbing to the same illegal behaviour or else risking being priced out of business. Although illegal phoenix activity is present in other industries, the construction industry and its characteristics make illegal phoenix activity prolific. Particular characteristics include making debt recovery difficult; encouraging sub-contracting and employing a large number of migrant workers or workers on 457 visas. However, there are initiatives that have been put in place to combat illegal phoenix activity.
has put in place a number of initiatives to combat illegal phoenix activity including:
The ATO has launched the Inter-Agency Phoenix Forum with a new Phoenix Taskforce, who use sophisticated data matching tools to identify, manage and monitor suspected fraudulent phoenix operators.
The ATO also enforces the legislative changes to the director penalty regime that were enacted in 2012 (incorporated in the Personal Liability for Corporate Fault Reform Act 2012 (No. 180 of 2012)(CTH)), which can lead to company directors being personally liable if they don't ensure their company meets certain tax obligations or, alternatively, goes into liquidation or voluntary administration if it can't meet those obligations.
The terms of reference for the inquiry (submissions closed on 17 April 2015) were the scale and incidence of insolvency in the Australian construction industry, including:
There were 21 individual submissions and the Inquiry is due to report to Parliament by 11 November 2015.
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