Following consultation with stakeholders about its new powers to wind up abandoned companies, on 8 November 2012 the Australian Securities and Investments Commission (ASIC) released a Regulatory Guide titled ASIC's power to wind up abandoned companies (RG 242), indicating the actions it proposes to take in relation to abandoned companies and "phoenix" companies. In this update, we review the background to ASIC's new powers.
WHY DID ASIC NEED TO ADDRESS THE ISSUE OF ABANDONED AND "PHOENIX" COMPANIES?
In July this year, important amendments were made to the Corporations Act 2001 (Cth) (Corporations Act), which have received very little public attention. The amendments were intended primarily to address the growing problem of abandoned companies and "phoenix" companies, and the damage which the practice of "phoenixing" can do to small suppliers and employees of such companies. The amendments were made via the Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth) (Phoenixing Act).
"Phoenixing" essentially refers to the process by which directors abandon a company without properly winding it up and simply transfer the assets of that company to another company, usually under a similar name to the abandoned company, in order to evade paying liabilities such as employee entitlements and money owed to smaller creditors. The new company, like the bird from Greek mythology, rises from the ashes of the old company and continues business with the same assets and customers leaving the former employees and smaller creditors without any effective means to pursue their claims.
Phoenixing behaviour is extremely costly to Australia. In its report to the Fair Work Ombudsman in July, PricewaterhouseCoopers estimated that phoenixing activity costs Australia between $1.78 billion and $3.19 billion a year.
The Corporations Act previously provided that a creditor or ASIC may apply to the court for an order to wind up a company. However, ASIC did not have any powers to wind up an abandoned company unless it was granted leave by the court to apply for an order that the company be wound up. The Phoenixing Act has introduced new Part 5.4C to the Corporations Act, providing that ASIC may order the winding up of a company if it considers that the company has been abandoned by its directors.
Prior to the introduction of the Phoenixing Act, ASIC could deregister a company (if, for example, it failed to lodge required financial returns). However this did not enable the investigation of the company's affairs nor address the claims of employees and other small creditors. A company could not be deregistered if it had any outstanding liabilities. In any event, an abandoned company would usually not have any assets to meet its liabilities as all the assets would have been transferred to the phoenix company.
Under the new law established by the Phoenixing Act, ASIC is able to refuse to voluntarily deregister a company where it decides that it is more appropriate for that company to be placed into liquidation. Liquidation may be more appropriate if ASIC suspects the company of being involved in phoenixing behaviour because the liquidator can investigate the affairs of the company and arrange for any outstanding entitlements to be distributed directly to employees and creditors.
These new powers have primarily been introduced to assist employees of abandoned companies to claim outstanding entitlements under the Federal Government's General Employee Entitlements and Redundancy Scheme (GEERS). GEERS is a basic payment scheme that assists employees who have lost their employment due to the liquidation or bankruptcy of their employer and who are owed certain employee entitlements. GEERS covers such entitlements as capped unpaid wages, annual and long service leave, capped payment in lieu of notice and capped redundancy pay. However, workers can only claim entitlements under GEERS if their employer is in the hands of a liquidator. Accordingly, the changes to the Corporations Act allow ASIC to wind up businesses where the directors have essentially tried to escape from their obligations to employees, so that the employees can access their entitlements through the scheme.
The changes which have been made to the Corporations Act do three key things:
- Give ASIC the power to wind up companies that have been abandoned by their directors
- Facilitate a more streamlined and cost-effective process for the publication of insolvency notices via a single, publicly available website hosted by ASIC
- Make technical changes consequent upon the introduction of the national paid parental leave scheme.
A brief summary of each of these changes is set out below.
ASIC'S POWER TO WIND UP ABANDONED COMPANIES
A new Part 5.4C of the Corporations Act provides that ASIC may order the winding up of a company under four different circumstances:
- If the company is more than six months late in responding to a return of particulars sent to it by ASIC; has not lodged any other documents with ASIC in the past 18 months; ASIC considers that the company is no longer carrying on a business; and ASIC believes that the order is in the public interest
- If the company has not paid its annual review fee within one year of the fee being due
- If ASIC has reinstated the registration of a deregistered company and ASIC believes the order for winding up is in the public interest
- If ASIC has reason to believe the company is no longer carrying on business and ASIC has provided notice of its intention to wind up the company to the directors and received no objection to the company being placed into liquidation. (As a side note, this notice must be sent to actual directors of the company, rather than "shadow directors" - being persons who are not validly appointed as directors but who either act in the position of a director or persons whose instructions or wishes the directors of the company are accustomed to act on).
In those circumstances where ASIC can wind up a company if it believes the order is in the public interest, ASIC's recently released RG 242 explains the factors that ASIC will consider in determining whether an order to wind up a company is in the public interest. As a threshold consideration, ASIC has indicated that it will generally only exercise its discretion to wind up a company where it believes there is sufficient evidence that the company is an abandoned company and winding up the company will facilitate employee access to GEERS. If this preliminary test is met, ASIC may consider other factors as follows in deciding whether to order the winding up:
- Whether there is a creditor capable of winding up the company and if sufficient time has passed to enable that creditor to take their own winding up action
- Whether the costs of liquidation will exceed the employee entitlements owed
- The number of employees affected by the company's abandonment
- Whether there are any current business or operations of the company that may have a value or incur significant liquidation costs
- The amount of funds available in the "Assetless Administration Fund" (a fund run by ASIC that finances preliminary investigations and reports by liquidators into the failure of companies suspected of fraudulent phoenix activity) to pay for the winding up and how the funds available would be best utilised.
Before making an order to wind up a company, ASIC must do two things:
- Give notice of its intention to make the order on the ASIC database
- Publish notice of its intention to make the order (which is explained further below).
Once ASIC makes an order to wind up the company, the obligations that the company would usually have to comply with to effect a voluntary winding up (as set out in Part 5.5 of the Corporations Act) are taken to have been made. In essence – the company is taken to have passed a special resolution that it be wound up voluntarily and made a "declaration of solvency".
Finally, ASIC has been empowered to appoint a liquidator in order to wind up the affairs of the company and arrange distribution of its property, and determine the remuneration to be paid to the liquidator.
In addition, as foreshadowed above, a change has been made to the deregistration provisions of the Corporations Act. The Corporations Act currently provides that a company, its directors or members can lodge an application to voluntarily deregister the company. Deregistration can be chosen in place of liquidation where the following circumstances are met:
- All the members agree to deregister the company
- The company is not carrying on any business
- The company has assets worth less than $1,000
- The company is not party to any legal proceedings
- The company has paid all fees and penalties payable under the Corporations Act to ASIC
- The company has no outstanding liabilities.
Under the new law introduced by the Phoenixing Act, if ASIC suspects a company of engaging in phoenixing behaviour, it is able to refuse to voluntarily deregister the company and instead put the company in the hands of a liquidator who can investigate the affairs of the company and arrange for employees and suppliers to receive any outstanding entitlements.
PUBLICATION OF INSOLVENCY NOTICES
The second key change introduced by the Phoenixing Act is to facilitate the online publication of insolvency notices. This change is intended to supplement ASIC's new powers to wind up companies by giving employees and other creditors easy access to information about companies that are undergoing either liquidation or deregistration.
Previously, the Corporations Act required the publication of a range of notices in the ASIC Gazette and print media in the course of an external administration (such as details of the final liquidation meeting, the passing of a resolution to voluntarily wind up a company and when ASIC intends to deregister a company). As pointed out by the Corporations and Markets Advisory Committee in its 2008 report Issues in External Administration, this was inefficient, time consuming and costly.
The Phoenixing Act repeals these requirements and instead requires all insolvency notices to be published in the ASIC Gazette and via a single website. This website is now up and running here.
The website provides a single point for searching almost all notices published from 1 July on external administration and company deregistration, which were formerly advertised in the print media. It is an extremely user-friendly site through which people can either post notices (after registering online, although registered liquidators are given automatic access) or search notices.
It does not cost anything to search the website or to register, however it costs $64 to post notices previously published prior to 1 July and $400 to post each new notice. This fee for the posting of new notices will be reduced to $145 from 1 July 2013. This will be substantially cheaper than previous costs to advertise in larger publications such as national and regional newspapers.
It is expected that the switch to publishing insolvency notices online will replace 53,000 newspaper advertisements over the next four years, which will save approximately $15 million in that same period. It is also a welcome change for affected stakeholders, who will be able to access important insolvency notices online rather than having to search through individual newspaper notices in each state and territory.
TECHNICAL CHANGES CONNECTED WITH THE PAID PARENTAL LEAVE SCHEME
Whilst not strictly a law that directly regulates phoenixing behaviour, changes have also been implemented to protect recipients of paid parental leave payments in circumstances where companies are being wound up, by providing for such payments to be made directly to those recipients.
These additional changes to the Corporations Act provide for the Department of Families, Housing, Community Services and Indigenous Affairs (which is responsible for the Paid Parental Leave Scheme) to be notified of the proposed winding up of any companies that it gives funds to as a "Paid Parental Leave Employer".
Once the Department is notified that such a company is being liquidated, it can decide whether to continue paying parental leave payments to the company or instead to make the parental leave payments directly to the employee.
These changes will help ensure that employees receive their paid parental leave entitlements, rather than such payments being made to companies in financial difficulty that may not pass on relevant entitlements to employees.
© DLA Piper
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.
DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com