On 13 February 2019, Parliament proposed a package of new reforms to combat the issue of illegal phoenix activity in the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018. The reforms introduce new provisions to the Corporations Act 2001 (Cth) that prohibit illegal phoenixing, protect creditors and keep directors accountable.
What is (Illegal) Phoenixing?
One issue the reforms aim to fix is the undefined nature of illegal phoenix activity, which currently has no legal or statutory definition.
Typically, illegal phoenixing involves the transfer of assets from one company to another in a deliberate attempt to avoid paying the original company’s debts. Liquidation of the abandoned company results in creditors being denied returns and employees recovering entitlements from the Government, while company directors sidestep the burden.
In 2018, Pricewaterhouse Cooper estimated that the annual cost of phoenixing to the Australian economy was close to $5.19 Billion, a figure that represents a significant amount of defeated creditors, unpaid employees and taxes owed.
What does Parliament Propose?
The Bill intends to create new offences for illegal phoenix activity and implements measures to prevent it from occurring. Some key points include:
– The introduction of new criminal and civil penalty provisions carrying the highest penalty available under the law.
- Granting ASIC the ability to recover assets on behalf of creditors.
- Granting the ATO the ability to withhold tax refunds for companies with outstanding payments.
- Making company directors personally liable for GST in certain circumstances.
- Preventing directors from improperly backdating resignations to avoid liability or resigning if it would render the company ‘directorless”.
What else is being discussed?
Parliament has also announced a variety of reforms to be rolled out, including the introduction of a Director Identification Number (DIN). A DIN would assign Australian company directors a unique number used to track their activity and look out for illegal phoenixing. This proposal is provided for in Commonwealth Registers Bill 2019 and currently has bipartisan support.
The idea of a ‘Phoenix Hotline’ has also been raised, wherein a direct phone line to the ATO would be provided for the reporting of illegal phoenix activity.
What about legitimate business rescue?
Phoenixing in itself is not an illegal activity. It can characterize a director attempting to save a company from liquidation through the transfer of property. The primary difference is the director’s intention.
In the case of genuine company failure, a director may engage in phoenix activity provided their actions are indicative of avoiding insolvency not dodging debts and liabilities. However, despite this distinction, directors will frequently liquidate companies that are capable of rescue due to the threat of personal liability that accompanies phoenixing. Directors run the risk of being personally liable for debts incurred while restructuring a company. This disincentives legitimate business rescue and convinces directors that jumping ship is the safest option.
To combat this, safe harbour laws have been introduced to allow directors to take reasonable steps to turn things around and be protected from liability in doing so.