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BFCSA: Phoenix Activity 1998 - 2014 all on ASIC's watch

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http://sydney.edu.au/law/slr/slr_34/slr34_3/SLRv34no3Anderson.pdf

 

page 3..................

II The Recognition of Phoenix Activity in Australia
The earliest report dealing exclusively with improper phoenix activity was that of the Victorian Parliament Law Reform Committee (‘VPLRC’) in 1994.13 The main recommendations — all sensible and practical — were to tighten the laws governing the disqualification of directors of companies, allocate more resources to detection and prosecution of offenders, change public and judicial attitudes to acknowledge the seriousness of this type of white-collar crime, improve information flows between regulators, and enact laws to allow the freezing of assets over which a company has a claim.  14 In response, in 1998 the ATO instituted the ‘Phoenix Project’, which allocated more staff to work with other agencies to address the phoenix problem.15 In 1999, the director disqualification provisions were consolidated but not significantly tightened.16 The 1994 VPLRC Report also recommended legislation to restrict the use of business names similar to those of the failed corporation, based on legislation in the United Kingdom.17 This final recommendation is the somewhat belated subject of one of the pieces of proposed legislation dealt with in this article.

 

In 2003, the Royal Commission into the Building and Construction Industry (‘Cole Royal Commission’) produced a lengthy report containing many recommendations, including a chapter devoted to phoenix companies.18 Among its many adverse consequences, Commissioner Cole noted that phoenix behaviour even affects competitors. Companies that fail to pay taxes, superannuation contributions and employee entitlements can undercut prices in tenders made by law-abiding companies,19 which may be induced to act in a similar manner if phoenix activity is not detected and prosecuted. Its recommendations included increasing liaison and information flows between Commonwealth and state revenue authorities20 and between the ATO and ASIC;21 and changing the law to allow the disqualification of directors after being associated with one failed company.22 The latter recommendation was not adopted, but the period of potential disqualification for directors was doubled in 2004.23 The Cole Royal Commission also recommended corporate group liability in relation to certain tax debts of other group members.24 This was not adopted.

 

Shortly after the Cole Royal Commission, the 2004 Stocktake Report 25 looked at a broad range of issues, including phoenix activity.26 It, too, produced a series of recommendations designed to increase its detection and prosecution. Echoing the Cole Royal Commission Final Report, the 2004 Stocktake Report recommended that disqualification be available where a director was associated with a single failed company.27 It also called for the release of the government’s response to the Companies and Securities Advisory Committee’s 2000 Corporate Groups: Final Report,28 which had canvassed a wide range of measures for piercing the corporate veil on corporate groups.29 Other recommendations related to administrative improvements to databases and the establishment of a hotline for the reporting of phoenix activity.30 As the 1994 VPLRC Report had done a decade before, the 2004 Stocktake Report called for the freezing of assets over which creditors have a just claim, without specifying the basis of such a claim.31 This was not acted upon...................

 

III Taxation Legislation to Tackle Phoenix Activity
In response to the 2009 Phoenix Proposals Paper, some relevant tax laws were changed in 2010, although they were scarcely ground-breaking reforms. None of the principal options from the 2009 Phoenix Proposals Paper were included in the new legislation. Instead, the director penalty notice provisions were moved 44 and amended in a minor way..................

 

At first glance, one wonders why these essentially procedural amendments were needed. In the tax realm, the Crimes (Taxation Offences) Act 1980 (Cth) already imposes criminal sanctions where a person enters into an arrangement with the intention of securing that a company will be unable to pay income tax or a range of other taxes including the superannuation guarantee charge.51Aiding and abetting such an arrangement or transaction by another is also covered.52 The penalties are 10 years imprisonment or 1000 penalty units or both. The existence of these penalties is publicised by the ATO via its taxpayer alerts.53 However, it is possible that this criminal offence, involving as it does the requirement to prove the accused’s intention beyond reasonable doubt, is simply too difficult to establish.On 5 July 2011, the Treasury released for public consultation an exposure draft of ‘tax law amendments to strengthen company director obligations and deter fraudulent phoenix activity’.


54 The release of the two Bills — the Tax Laws Amendment (2011 Measures No 8) Bill 2011 (Cth) and the Pay As You Go Withholding Non-compliance Tax Bill 2011 (Cth) — acknowledged that ‘[w]hile these amendments aim to deter fraudulent phoenix activity, they apply more broadly to extend the personal obligations of company directors to ensure that the company complies with its PAYG withholding and superannuation guarantee obligations.’55 Under the amendments, the ATO would be allowed to pursue directors immediately under the director penalty regime if the company’s unpaid PAYG withholding and superannuation guarantee liabilities remained unpaid and unreported three months after becoming due, without the need to issue a penalty notice. This was intended to relieve some of the enforcement burden felt by the ATO.

 

However, on the recommendation of the House of Representatives Standing Committee on Economics, which was responding to fears raised by the business lobby, these amendments were not passed by Parliament in late 2011  Revised drafts of these Bills57 were released for public comment in April 2012 and passed through the Parliament, following a favourable report by the House of Representatives Standing Committee on Economics at the end of June 2012.58 The new laws are still unpopular with business because they lack an accepted definition of phoenix activity, and, accordingly, directors acting in good faith and attempting to comply with their obligations could also be penalised. Unfortunately, the Tax Laws Amendment (2012 Measures No 2) Act 2012 (Cth) has removed the proposed automated director penalty notice, which was a feature of the 2011 Bill, which means that the onus is back on the ATO to detect breaches and enforce the law.

 

 

IV Current Corporations Legislation Relevant to Phoenix Activity
After nearly two decades of reports and relatively little action, it appears that the government’s response to phoenix activity has been confined to tinkering at a micro level with taxation laws, and that even some of those reforms are being stymied by the vigorous objections of business representatives..............

 

V The Phoenixing Act and the Similar Names Bill
Against this background, just prior to Christmas 2011, the federal government released two exposure drafts of legislation — the Corporations Amendment (Phoenixing and Other Measures Bill) 2012, passed into legislation in May 2012 ‘Phoenixing Act’) and the Corporations Amendment (Similar Names) Bill 2012. These recognise that phoenix activity affects more than taxation authorities, and takes up one of the recommendations of the 2009 Phoenix Proposals Paper in relation to the resurrection of a company with a similar name to that of its liquidated predecessor....................

 

These were very ambitious claims, and seemed to promise that the government had finally heeded the repeated calls for legislation to tackle phoenix activity. Yet both instruments are extremely limited in their scope.  The Phoenixing Act gives ASIC the power to order the winding up of a company where it becomes apparent that it is not carrying on business, evidenced for example by the non-return of ASIC forms or the non-payment of fees.  91ASIC may then appoint a liquidator to wind up the affairs of the company.......................

 

VI Analysis of the Phoenixing Act and the Similar Names Bill
Despite the wide recognition of the damage caused by phoenix activity and the benefits that the new Act and the proposed Bill will bring, the Parliamentary Secretary’s claims noted above are not justified. The amendments might make some slight inroads in the case of basic phoenixing but do nothing about sophisticated phoenixing in corporate groups. Apart from the improved access to GEERS that will flow from the Phoenixing Act, discussed below, nothing has been done or is proposed to be done to protect employee entitlements or the rights of other unsecured creditors. Nothing has been done with regard to phoenix activity within VAs. The government must therefore acknowledge that more is needed..................

 

In 1997, Ramsay and Stapledon found that 89 per cent of the top 500 companies listed on the Australian Stock Exchange had at least one controlled entity and on average, each listed company had 28 controlled entities.104 Any legislation to deal with phoenix activity within corporate groups will impact business structures far beyond those against whom it is targeted.


A The Phoenixing Act
It appears that the government, keen to be taking action but anxious not to alarm the business community, has only tackled simple issues, the ‘low-lying fruit’......................

 

There is no data available from ASIC to determine whether ASIC exercises these powers to prosecute phoenix behaviour by the directors of deregistered companies. It would therefore appear that the Phoenixing Act, in providing ASIC with an administrative power to order the winding up of a company, aims to shift at least some of the responsibility for detecting and prosecuting phoenix activity from ASIC to a liquidator. However, where the deregistered companies are without assets, it is questionable whether liquidators will be willing to accept these appointments. The new legislation provides that in the absence of a liquidator willing to take the role, ASIC itself must appoint a liquidator.115...............

 

B The Similar Names Bill
The Similar Names Bill is a useful improvement if it deters the behaviour that it targets, but its limitations are clearly evident. It does nothing to prevent phoenix behaviour where a different name is used for the new company................

 

C Phoenixing and Voluntary Administration
Both the Phoenixing Act and the Similar Names Bill avoid the complex area of VA. Neither addresses the situation where a failed company has entered VA and the company has been rescued via a deed of company arrangement (‘DOCA’).............

 

page 25

VII Conclusion

 

 

http://www.asic.gov.au/asic/asic.nsf/byheadline/Small+business+-+illegal+phoenix+activity?openDocument

 

Illegal phoenix activity

Illegal 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. By engaging in this illegal practice, the directors avoid paying debts that are owed to creditors, employees and statutory bodies (e.g. the ATO).

Illegal phoenix activity is a serious crime and may result in company officers (directors and secretaries) being imprisoned.


Characteristics of illegal phoenix activity

Not all company failures will involve illegal phoenix activity. Genuine company failures do occur. Where a business has been responsibly managed, but fails, that business may continue after liquidation by using another corporate entity without, necessarily, being involved in illegal phoenix activity.

Illegal phoenix activity, on the other hand, typically involves those in control of companies, such as directors or former directors, deliberately avoiding liabilities by shutting down the original indebted company (e.g. by placing it into liquidation), transferring some or all of the assets to another company and then using that company to conduct the same type of business.

This practice severely disadvantages creditors and gives these business operators an unfair competitive business advantage.

While illegal phoenix activity can take many forms, the key characteristics are that:

  • the company fails and is unable to pay its debts
  • the company acts in a manner that intentionally denies unsecured creditors equal access to the company's assets to meet and pay debts
  • soon after the failure of the initial company (usually within 12 months), a new company commences 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 impact of illegal phoenix activity

Figures in a report commissioned by Fair Work Australia put the cost of this activity to the Australian economy at potentially more than $3 billion annually.

The report, Phoenix activity: sizing the problem and matching solutions, estimates that the annual cost of illegal phoenix activity is:

  • up to $655 million for employees, in the form of unpaid wages and other entitlements
  • up to $1.93 billion for businesses, as a result of phoenix companies not paying debts, and for goods and services that have been paid for but not provided, and
  • up to $610 million for government revenue, mainly as a result of unpaid tax – but also due to payments made to employees under the General Employee Entitlements and Redundancy Scheme (GEERS) now the Fair Entitlement Guarantee (FEG).

Those affected by illegal phoenix activity include employees of the original failed company, other businesses that are owed money because they have supplied goods and services and statutory bodies like the Australian Taxation Office.

ASIC initiatives

ASIC currently has a number of initiatives to combat illegal phoenix activity.

Funding liquidators: The Assetless Administration Fund was established by the Australian Government and is administered by ASIC. It is used to finance preliminary investigations by liquidators into the cause of the failure of companies with few or no assets. Liquidators prepare and lodge reports with us. We may then consider taking enforcement action.

Disqualifying directors: We can also disqualify directors from managing corporations where they have been involved in two or more companies that have been placed into liquidation within the past seven years. We rely on statutory reports provided by liquidators to support our decisions to disqualify directors from managing corporations. A significant number of statutory reports allege illegal phoenix activity. Directors can be disqualified for up to five years.

Liquidators Assistance Program: ASIC regularly helps liquidators to secure the books and information of companies in external administration by ensuring that directors comply with their legal obligations. Directors who fail to meet their obligations may face court action.

Identifying and deterring illegal phoenix activity: In July 2013, ASIC launched a new surveillance initiative aimed at deterring illegal phoenix activity, with a focus on failed companies in the construction, labour hire, transport, security and cleaning industries where there have been allegations of illegal phoenix activity.


We are now paying special attention to individuals who are current directors of new companies, but were also directors at the time these companies failed or ceased being directors shortly before the companies were wound up.

ASIC is meeting with industry representatives to raise awareness about illegal phoenix activity and our other regulatory initiatives. 

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