Australia: Directors – beware of the Phoenix

Last Updated: 5 May 2012
Article by Kelvin Tam

We recently released an e-alert on the law reforms on directors' derivative liability. Although not directly part of the derivative liability reforms, the close of 2011 and the first half of 2012 has seen a variety of exposure drafts, submissions, and parliamentary jostling over another key area of directors' liability – the Federal Government's law reforms to counter phoenix activities.

Essentially, phoenixing is where a failing company with substantial debts goes into liquidation, and a company with a very similar name to the liquidated company then commences trading. The new company usually provides similar, if not the same, goods or services, and their directors are often the same as or related to the directors of the failed company, but without the baggage of the liability to the creditors of the failed company. The following proposed laws attempt to make directors personally liable for the debts of the new (similar) company, and also give ASIC the power to wind up dormant companies.

The proposed 'Similar Names' Bill

Although yet to be introduced into Parliament, the exposure draft of the Similar Names Bill proposes changes to the Corporations Act 2001 (Cth) that will make a director personally liable for the debts of a "debtor company" (i.e. the company not in liquidation) if:

  • the debt was incurred when the person was a director of the debtor company; and
  • that director was also the director of a failed company within 12 months prior to the winding up of that failed company; and
  • when the debt was incurred (by the debtor company) the debtor company was known by a name that was the same as the pre-liquidation name of the failed company, or was so similar to the pre-liquidation name of the failed company as to suggest an association with the failed company; and
  • the debt was incurred within 5 years from the date of the winding up.

As such, the Similar Names Bill is aimed at guarding against future conduct, rather than remedying the past failings of the directors of the company that goes into liquidation.

The Similar Names Bill does however propose some exemptions, including:

  • where the failed company has paid all of its debts in full;
  • where the debtor company was carrying on a business in the 12 month period before the commencement of the winding up of the failed company, such that the debtor company with the same or similar name was not 'dormant' during the 12 month pre-winding up period of the failed company; or
  • where the director obtains a Court order exempting them from liability, or an exemption granted by the liquidator of the failed company. In granting such an exemption, the Court or liquidator will be required to consider whether the director has acted honestly, by taking into account:
    • whether, at the time the person was a director of the failed company, the failed company was likely to be insolvent;
    • the extent to which assets of the failed company have become assets of the debtor company;
    • a consideration of how similar the debtor company is to the failed company, including a comparison between the insolvent and the debtor companies' employees, premises and contact details; and
    • whether anything done or omitted to be done by the director of the debtor company is likely to create the misleading impression that the failed company and the debtor company are the same company.

The Phoenixing Bill and the power of ASIC to wind up dormant companies

The Phoenixing Bill amends the Corporations Act 2001 (Cth), and is currently before the Senate. It aims to bring employees of abandoned (but not wound up) companies under the operation of the General Employee Entitlements and Redundancy Scheme (GEERS). This will be achieved by giving ASIC the power to place a company into liquidation where, in essence, the company is not carrying on a business, instead of the employees having to incur costs (which may be prohibitive for them) to do so.

By providing this administrative power to ASIC, a dormant company (which may be a company left behind after formation of a phoenix company) can be wound up, therefore bringing the employees of that company into the operation of GEERS. Once ASIC orders a winding up, liquidators will be able to investigate the company for any misconduct.

While the Phoenixing Bill appears certain to pass into law, the fate of the Similar Names Bill is less clear, as the submission process has now closed and a variety of critical submissions appear to have been received by Treasury. In particular, there have been criticisms that the Bill has not gone far enough, as the condition that the debtor company and the failed company must be known by the same or similar names can be easily circumvented.

We will keep you updated as these reforms surrounding directors' personal liability develop and come into force.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Kelvin Tam
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