Vincents Chartered Accountants’ Louisa Sijabat, a Trustee in Bankruptcy, Registered Liquidator, Chartered Accountant and Director, and Damien Davis, a Senior Manager, discuss the Government’s planned reforms to the corporations and tax laws to combat illegal phoenix activity, as foreshadowed in the 2018-19 Budget. Treasury is seeking feedback on the draft legislation until 27 September.
Recently released draft legislation for a comprehensive package of reforms to combat illegal phoenixing is the latest stage in the Federal Government’s reform of the insolvency and corporate governance provisions, specifically focusing on combating the practice of stripping a failing company of its assets in an attempt to defeat creditors.
The establishment of the Phoenix, Black Economy and Serious Financial Crime Taskforces involving a number of national and state level government departments, including the Australian Securities and Investments Commission, the Australian Taxation Office and various state based Departments of Fair Trading is indicative of the seriousness which the Government considers the problem.
Illegal phoenixing is estimated to cost the Australian economy between $2.85 billion and $5.13 billion annually according to a report conducted by the Phoenixing Taskforce. The significant range in costs represents the flow on effects of phoenixing, such as increased insurance costs and the negative impact it has on a free market economy through artificial price manipulation.
The key components announced in draft legislation include:
1. Introducing new phoenix offences which target both those who conduct and those who facilitate illegal phoenix transactions including:
1.1. making it an offence for company directors to engage in creditor defeating transfers of company assets;
1.2. making pre-insolvency advisors and other facilitators of illegal phoenix activities liable to both civil and criminal penalties; and
1.3. extending and enhancing the existing liquidator “claw back” powers;
2. preventing directors from backdating their resignations to avoid personal liability;
3. preventing a sole director from resigning and leaving a company as an empty corporate shell with no director;
4. extending Director Penalty Notice provisions to include GST and related liabilities; and
5. restricting the voting rights of related creditors at meetings considering the appointment or removal of an external administrator.
The activity of “phoenixing” has historically been something that insolvency professionals have sought to have regulated. The Corporations Act 2001 as originally drafted contains no specific sections preventing phoenixing activity, although there are numerous sections of the Act, such as the uncommercial transactions section and the duty of directors to act in good faith which can be applied by liquidators and the regulator to seek compensation from directors who engage in phoenixing.
The lack of funding and assets available in the corporate shells of companies that have been phoenixed has meant that often there is little money left to fund the liquidator to engage in legal proceedings against those who have engaged in phoenixing.
Some of the activities associated with phoenixing, such as setting up a new company and the sale of assets from one company to another are legal and legitimate actions when done utilising a proper valuation of the company’s assets and not for the purpose of defeating creditors.
The draft legislation includes both criminal and civil sanctions on both directors and external advisors including accountants, lawyers and pre-insolvency advisors for “inducing or encouraging” creditor-defeating dispositions of company assets, which is an expansion of the existing penalty provisions long called for by insolvency professionals.
The draft legislation seeks to punish creditor-defeating dispositions which occur when the company is insolvent or result in the company becoming insolvent or which occur up to twelve (12) months prior to the start of an external administration. This targets cases where directors have engaged in phoenixing activity and paid selected creditors, then waited out the six (6) month unfair preference recovery period for unrelated creditors prior to winding up the business and putting such payments out of the reach of Liquidators under the current legislation.
It will remain of interest to see whether the government will continue the reform process and instigate some more of the insolvency profession’s further requests in the area, including the establishment of unique director identification numbers for monitoring director appointments, and increased funding opportunities for both ASIC and the ATO in order to provide liquidators with a greater opportunity to pursue illegal phoenixing activities.
Louisa Sijabat is a Trustee in Bankruptcy, Registered Liquidator, Chartered Accountant and Director at Vincents Chartered Accountants. She specialises in assisting people and companies experiencing financial difficulties and advising them on the options available to them. She also acts as a Trustee in administering bankrupt estates, and a Liquidator, Administrator and Receiver of companies. Contact Louisa at [email protected]
Damien Davis is a Senior Manager at Vincents Chartered Accountants and a Certified Practicing Accountant. He has worked in the insolvency industry for nearly twenty years both around Australia and in the United Kingdom, Middle East and Europe. Damien Specialises in complex matters, particularly those involving legal proceedings relating to insolvent trading and uncommercial transaction recoveries. Contact Damien at [email protected]