New measures are needed to curb the disturbing and costly rise in illegal phoenix activity.
The Australian Government recently announced a comprehensive package of proposed reforms to combat illegal phoenix activity. These new measures will assist work by government agencies such as the Australian Securities and Investments Commission (ASIC). So what is illegal phoenix activity and why does it matter?
What is illegal phoenix activity?
When companies fail or become insolvent, directors may register a new company to take over the business of the old company. This is referred to as phoenix activity and can be a legitimate way to rescue failed businesses. Phoenix activity becomes illegal or fraudulent when directors deliberately and improperly transfer the assets of a failing company to another company before handing the company over to an external administrator to avoid having to pay outstanding liabilities to its creditors including employees. This is a misuse of the corporate form as it denies creditors access to the company's assets to recover unpaid debts.
Impact of illegal phoenix activity
Phoenix activity is becoming more sophisticated and difficult to detect. In fact, we have identified a number of worrying trends in recent times, including pre-insolvency advisers facilitating illegal phoenixing as a way to save failing businesses, and new companies being structured with the intention of carrying on illegal phoenix activity.
The impact of illegal phoenix activity on the economy is enormous. In 2012, the Fair Work Ombudsman and PwC estimated that illegal phoenix activity cost the Australian economy as much as $3.2 billion each year. As well as the financial burden, illegal phoenix activity has a broader impact through undermining market confidence and integrity, avoidance of debts to creditors, employee entitlements and taxes. In addition, there are negative economic and social implications.
Proposed reforms to address illegal phoenix activity
The Australian Government recently proposed for public consultation a number of measures to deter and disrupt illegal phoenixing, following recommendations of its Phoenix Taskforce in 2014.
Broadly, the proposed reforms seek to deter and disrupt illegal phoenix activity and remove the unfair competitive advantage that flows from this, while minimising any unintended impacts on legitimate businesses and honest restructuring.
The proposed reforms seek to amend the corporations and taxation laws to assist regulators to target those who repeatedly misuse corporate structures and to enable stronger action against individuals involved in illegal phoenixing.
Key measures include:
- A new Director Identification Number to uniquely identify directors, and enable regulators to map relationships between companies, directors and others.
- Introducing specific offences for illegal phoenixing, and penalties for advisers who assist phoenix operators.
- Establishing a 'phoenix hotline' to enable the public to report illegal phoenix activity.
- Preventing directors from backdating their resignations to avoid personal liability.
What is ASIC's role in addressing illegal phoenixing?
ASIC plays a significant role in protecting Australians from illegal phoenixing and relies on liquidators to report suspected illegal or fraudulent phoenix activity. We will take enforcement action where there is sufficient evidence and we consider it in the interest of the public or the broader market.
In addition to our powers against directors who breach their duties, we can also disqualify people who have been a director of two or more companies placed in liquidation over a seven year period. We also work with the market to identify companies at risk of engaging in phoenix activity, meet with industry representatives to raise awareness of illegal phoenix activity, and collaborate with other agencies to exchange information.
The proposed reforms by the Government will extend ASIC's powers and ensure that we are well equipped to detect and deter illegal phoenixing activity in future.
Find out more on asic.gov.au, including Information Sheet 212, which explains what to do if you are concerned about phoenix activity.
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