Announcements in the Federal Budget for 2018-2019 saw the Turnbull government continue their crackdown on illegal phoenix activity. Their reform package aims to transform corporations and tax laws in order to provide regulators with additional tools to disrupt “phoenixing”.
What is illegal phoenix activity?
There is no legal or statutory definition of phoenix activity. The Australian government notes that phoenixing can encompass both legitimate business rescue as well as the use of serial insolvency to avoid paying creditors.[1]
Fraudulent or unlawful phoenix activity usually involves the transfer of assets of a company to another company in circumstances where the company that made the transfer was unable to pay its debts when due. The transfer is done in order to deprive unsecured creditors equal access to its assets. There is usually a link between the management and shareholding of the old and new company.
Illegal phoenixing is orchestrated to leave behind a shell company, whereby the liquidation of that company will occur resulting in limited to no returns to creditors. This in turn forces employees to recover their entitlements through the Fair Entitlements Guarantee scheme at the expense of the Commonwealth government.
Accordingly, it is important to seek professional advice before any business restructure.
Costs to the Australian economy
Whilst the impact of illegal phoenix activity is difficult to quantify, in 2012 the cost of illegal phoenix activity was estimated to be in the range of $1.8 to $3.2 billion per year.[2] Such activity has widespread impact through the avoidance of debts to creditors, avoidance of paying employee entitlements and a loss of market integrity which comes at an increased cost to regulators.[3]
Planned reforms
In his announcement, Treasurer Scott Morrison said that the Federal Government plans to introduce a number of measures to protect Australian business from those companies that choose to “deliberately go bust to avoid paying their bills” including:
- The introduction of new phoenix offences in the Corporations Act 2001 (Cth) to target those that conduct or facilitate illegal phoenixing. This will include offences for directors that fail to produce adequate books and records to a liquidator;
- Prevent company directors from improperly backdating resignations to avoid liability or prosecution. In particular, where directors lodge a change in director notice more than 28 days after the director’s resignation, they may be liable for misconduct up until the date of lodgement;
- Limit the ability of directors to resign where it would leave a company with no directors;
- Restrict the ability of related creditors to vote on appointment, removal or replacement of an external administrator;
- Extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, in turn making directors personally liable for such tax debts of a company; and
- Expand the ATO’s powers to retain refunds where there are outstanding tax lodgements.
These proposed measures build on reforms that already saw the introduction of the government’s Phoenix, Serious Financial Crime and Black Economy taskforces. Other announced reforms include a combined black economy and illegal phoenixing hotline, as well as reforms to address the corporate misuse of the Fair Entitlements Guarantee and non-payment of the Superannuation Guarantee Charge. At the centre of the reforms is the introduction of a Director Identification Number (DIN). The long awaited and much-discussed DIN will give every director in Australia a unique number. DINs will be used by government agencies and regulators to track the activity of directors in relation to alleged phoenix activity, including their interaction with accountants and lawyers.
The government is now tasked with rolling out the reforms and ensuring they are appropriately targeted in order to avoid legitimate and honest directors getting caught in the crackdown.
Levi Smouha, Partner of Rostron Carlyle Rojas Lawyers, is an expert in restructuring and corporate insolvency. Contact Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email our office at [email protected].
[1] Australian Government the Treasury, Combating Illegal Phoenixing (2017), 1.
[2] “Phoenix activity: Sizing the problem and matching solutions” PWC and Fair Work Ombudsman, page 15, June 2012
[3] Australian Government the Treasury, above n 1, 2.
