VIC Bill Targets Illegal Phoenix Activity

Tuesday 5 November 2019 @ 2.04 p.m. | Legal Research

On 29 October 2019, the Minister for Planning Richard Wynne introduced the Building and Environment Protection Legislation Amendment Bill 2019 (VIC) (“the Bill”) into the Victorian Legislative Assembly. In particular, the Bill makes amendments to give additional powers to the Victorian Building Authority (“the VBA”) to investigate and curb illegal phoenix activity.

Illegal Phoenix Activity

The Australian Securities and Investments Commission (“ASIC”) clarifies:

“Illegal phoenix activity is where a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes, creditors and employee entitlements.”

The practice usually occurs where directors of a company transfer assets from an existing company into a new company without receiving market value payment. Once the assets are transferred, the old company is placed in liquidation. Since there are no assets left under the old company, its outstanding debts cannot be paid by the appointed liquidator. As a result, sub-contractors, creditors, and employees are left unpaid for their work; and the community goes without the taxes that the company owes. The government is usually then left to subsidise outstanding employee entitlements.

Meanwhile, the new company continues to operate. The new company gains an unfair advantage within the marketplace, as it carries less debt than it should and therefore has lower operating costs.

In July 2018, the Australian Taxation Office released its report, The Economic Impacts of Potential Illegal Phoenix Activity, which estimates the annual costs of these illegal activities within Australia:

  • Between $1.2 million to $3.2 million in unpaid trade credits
  • Between $31 million to $298 million in unpaid entitlements to employees
  • About $1.7 million in unpaid taxes and compliance costs.

The Bill

The Bill proposes the amendment of the financial probity requirements for practitioner registration and renewal under the Building Act 1993 (VIC) (“the Building Act”). These requirements form part of the fit and proper test of the registration and renewal process. These amendments seek to allow the VBA to look into company directors, secretaries, and other influential persons affiliated to the company as part of the process. The Bill also proposes the introduction a new definition regarding influential persons affiliated to the company. This definition further broadens the VBA's powers in order to address and investigate individuals who are not officially part of the body corporate, but are able to exert significant influence over its business and operations.

Following its investigations, the VBA will then be able to refuse applications for registration or renewal of registration where the applicant or associated parties are suspected to have engaged in illegal phoenix activities at any time over the past two years.

The Bill also seeks to expand existing VBA suspension powers under the Building Act. Under these amendments, the VBA will be able to immediately suspend the license or registration of a plumber on public safety grounds. This includes actions by the plumber that show a pattern of:

  • A disregard for public health and safety
  • A lack of concern regarding potential damage to neighbouring properties
  • Multiple disciplinary hearings.

The Bill also makes additional amendments in order to:

  • Improve and strengthen the Architects Registration Board of Victoria in order to boost consumer protection and confidence in the industry.
  • Introduce a three year expiry date for certificates of accreditation issued by the Building Regulations Advisory Committee.
  • Abolish the Building Practitioners Board and transfer its outstanding inquiries to the VBA.

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