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05 November 2018

Federal government targeting illegal pheonixing of companies

​We have probably all heard of (and some of us will have been impacted by) companies that are unable or unwilling to pay their debts and are placed into liquidation, often leaving creditors with little recourse other than to await the outcome of the liquidation and see if they will receive any or a partial payment towards the money the company owes to creditors.

Shortly afterwards the company arises from the ashes badged as a new company, but often with the same directors, and takes over the previous companies business and quite often repeats the process again. This has a damaging effect on many businesses who can sustain significant losses (often driving their businesses to the wall as a result) and has been long recognised as hurting all Australians, including employees, creditors, competing business and taxpayers. This is often referred to as phoenixing a company.

Phoenixing simply refers to the stripping and transfer of assets from one company to another to deliberately avoid having to pay the debts of the company. Sometimes this can be part of a legitimate business rescue but is more often done for more sinister reasons.

Phoenixing is estimated to cost the Australian economy between $2.9 billion and $5.1 billion annually as reported here at paragraph 2.2.

The good news is that the Federal Government is finally doing something about this after engaging in public consultation in 2017 and legislation is to be passed to bring about changes that will target people who engage in illegal phoenixing of companies.

In a recent media release by Treasury, it is stated that the proposed reforms to combat illegal phoenix activity will include reforms to:

  • introduce new phoenix offences that target those who conduct and those who facilitate illegal phoenix transactions;
    • It will be an offence for company directors to engage in creditor‑defeating transfers of company assets that prevent, hinder or significantly delay creditors’ access to those assets.
    • Pre-insolvency advisers and other facilitators of illegal phoenix activities will also be liable, as there will be a separate offence for any person who procures, incites, induces or encourages a company to make creditor‑defeating transfers of company assets.
    • These will be both criminal and civil offences, attaching the highest penalties available under the law.
    • The offences will be supported by an extension of the existing liquidator asset clawback avenues to cover illegal phoenix transactions. ASIC will also receive a new regulatory tool to recover property that has been transferred under an illegal phoenix transaction.
  • prevent directors from backdating their resignations to avoid personal liability;
  • prevent a sole director from resigning and leaving a company as an empty corporate shell with no director;
  • extend the director penalty provisions to make directors personally liable for their company’s GST and related liabilities;
  • expand the Australian Taxation Office’s existing power to retain refunds where there are tax lodgments outstanding;
  • restrict the voting rights of related creditors of the phoenix operator at meetings regarding the appointment or removal and replacement of an external administrator.

The legislation is tightly targeted at those who misuse the corporate form, while minimising any unintended impacts on legitimate businesses and restructuring.

In addition to these reforms, the Federal Government is also taking steps to legislate to introduce a requirement for a person who is or becomes a director (including an alternate director) of a company to hold a Director Identification Number (DINs). The Explanatory Memorandum for the DIN legislation indicates that:

  • a DIN will require all directors to confirm their identity and it will be a unique identifier for each person who consents to being a director.
  • The person will keep that unique identifier even if their directorship with a particular company ceases.

As such, the DIN will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and will prevent the use of fictitious identities. This will assist regulators and external administrators to investigate a director’s involvement in what may be repeated unlawful activity including illegal phoenix activity. Significant civil and criminal penalties will also apply to breaches of the DIN requirements.

More details about the proposed DIN legislation can be found here on the Treasury website.

These changes are welcome and will hopefully go a long way towards combating the illegal phoenixing that has been taking place, essentially unchecked for too long.