Federal Opposition Announces Plans to Stop "Phoenixing"

Thursday 25 May 2017 @ 10.39 a.m. | Corporate & Regulatory | Crime | Taxation | Trade & Commerce

The Federal opposition has announced that, in government, it would crack down on the practice known in corporations law circles as "Phoenixing". 

What is Phoenixing? 

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. In this way the directors avoid paying debts that are owed to creditors, employees and statutory bodies.

It is not the case that all company failures involve phoenix activity and genuine company failures occur and failed businesses may continue after liquidation by using another corporate entity without, necessarily, being involved in illegal phoenix activity. There are key indicators of phoenix activity, such as:

  • a company fails and is unable to pay its debts;
  • a company acts in a manner that intentionally denies unsecured creditors equal access to company assets to meet and pay debts; and
  • soon after the failure of an initial company (usually within a 12 month period), a new company is created 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.

The Opposition's Proposal

The opposition proposal was announced by the Shadow Minister for Employment and Workplace Relations, Brendan O’Connor, the Shadow Small Business and Financial Services Minister, Katy Gallagher and the Shadow Assistant Treasurer, Andrew Leigh in a joint statement critical of the federal government for being too easy in the regulation of this area of corporate law.

The opposition is reported as saying it will:

  • introduce a system of compulsory ID numbers for all directors of  Australian companies; 
  • increase the maximum penalties associated with illegal phoenix activity; and 
  • take on a number of  recommendations from a comprehensive set of research findings on phoenix activity that was handed down by researchers at Monash and University of Melbourne in February 2017.

As part of the oppositions plan any Australian wanting to become a company director would be required to obtain a unique identifier number or ID number with a 100-point identification check, before they could launch a business.

The opposition claims these changes would close/tighten up the ease with which it is possible to start up a company in the present system, and are reported as saying:

“Currently it is easier to become a company director than open a bank account, yet the government has barely raised a peep about phoenix activity, . . .  This process allows them to avoid paying the money owed to the failed company’s creditors, which are often the company’s employees, other small businesses and the Australian Tax Office.”

Under the opposition's proposal, penalties would also be increased, with the maximum penalty for a breach of director’s duties under the Corporations Act 2001 (Cth) being increased to $500,000. 

Opposition's Proposals Not New

The government, while not yet moving on the notion of a “Director Identification Number” (DIN) , is reported to have "engaged" with the idea along with other measures to protect the business community included in its most recent response to the Productivity Commission Report, Business Set-up, Transfer and Closure [see in particular, recommendation 15.6]. This recommendation suggests that in addition to the existing requirements for directors under section 117 of the Corporations Act 2001 (Cth), the section should be amended to require that: "at the time of company registration, directors must also provide a Director Identity Number".

Other requirements of a DIN should would be:

  • obtained from the Australian Securities and Investments Commission (ASIC) via an online form at the time of an individual’s  first directorship; 
  • to obtain a DIN individuals should be required to provide identity proof (based on the personal identification requirements for   opening a bank account), and verify that they have read brief materials on directors’ legal responsibilities provided as part   of the online registration;
  • existing companies, directors should be required to obtain a DIN; and
  • to enforce the requirements, ASIC should be empowered under section 205E of the Corporations Act 2001 (Cth) to ask a person who   is a director to provide their DIN.

It is reported the Small Business Minister, Michael McCormack has said that the government is still considering the DIN recommendation “. . . as part of [the government’s] ongoing work on insolvency reforms”.

What Reform Could Achieve and Will it Happen

The cost of not acting on "Phoenixing" is high - the Productivity Commission report, referred to above, reported that there were between 2,000 to 6,000 Phoenix like companies operating in Australia, costing the economy between $1.8 billion to $3.2 billion every year. It will be interesting to see how quickly this gap in corporate regulation is addressed and whether it will be a bipartisan approach to the solution given both sides have indicated interest in reform.  

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. Nothing on this website should be construed as legal advice and does not substitute for the advice of competent legal counsel.

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