Australia: Phoenixing rising: corporate misuse of FEG sparks crackdown

This week's TGIF considers the recent proposals to crackdown on rogue directors and reduce the burden on FEG to pay unpaid workers.


On 17 May 2017, the Federal Government published a consultation paper inviting submissions on options for law reform to address corporate misuse of the Fair Entitlements Guarantee ('FEG') scheme.

FEG steps in when a business goes bust and there are insufficient funds to meet employee entitlements. Costs of the scheme, and to the taxpayer, have skyrocketed recently with amounts totalling more than $1 billion being paid out in the past five years alone.

The consultation paper sets out a number of options for reform and was shortly followed by a policy announcement from the Federal Opposition outlining its position to stamp out misuse of FEG and, in particular, illegal "phoenixing".

This week we look at what has triggered this cost blowout, what options are on the table and provide our view as to what approach might be the most effective.


Government assistance programs to protect employees have been around since early 2000 effectively acting as a 'safety net' to protect unpaid workers caught up in corporate insolvencies.

These programs were complemented by reforms to the corporations legislation and the introduction of Part 5.8A which imposed criminal and civil penalties on those who enter into an arrangement or transaction with the intention of reducing the recovery of employee entitlements on insolvency.

However, these provisions are almost never utilised (with a strike rate of zero) and, in the 2015-16 financial year, the total assistance provided by FEG blew out to $284.1 million. This cost, and the fact that FEG rarely recovers more than 10% of monies advanced, has placed these issues firmly on the legislative agenda.


The Federal Government cites "sharp corporate practices" for the increasing trend. These practices are said to include:

  1. utilising corporate group structures so that employees are employed by a separate entity with limited realisable assets;
  2. transferring assets to another company prior to liquidation to avoid liabilities;
  3. appointing a friendly liquidator who won't conduct investigations; and
  4. receivers and liquidators keeping proceeds realised from circulating assets.


Most of the attention has been focused on the practice outlined in point 2 above but, of course, this is not in and of itself an illegal activity. And herein lies part of the problem.

While it is completely permissible for directors of a company that has gone under to continue business through another corporate entity, it is the identification of illegal phoenix activity that makes its detection so difficult.

As it currently stands, the task most often falls to well-resourced liquidators who, through their investigations, are able to uncover and identify transaction patterns of directors as indicia of the activity.

ASIC has some initiatives to combat illegal phoenix activity but this is not enough to prevent an estimated cost to the Australian economy in excess of $3 billion.


The Federal Government has put forward a series of measures to address these issues which include:

  1. re-drafting section 596AA to reduce the burden of proof for a successful action and specifying the scenarios to which the provision applies;
  2. imposing a contribution requirement on solvent group members to meet the unpaid entitlements of their related entity; and
  3. lifting the penalties for serial offenders and extending the scope of the disqualification powers of ASIC.

The Federal Opposition has taken this last idea one step further and foreshadowed the introduction of a director identification number (DIN), for all directors, to track unscrupulous directors. A $50 fee would be payable for a DIN.


A combination of the reform proposals will likely generate the best outcome for the taxpayer.

We think an objective test under s 596AA is more reasonable than the current position. Such a test, either as an assessment of the transaction entered into or the actions of the directors themselves, will more likely capture a broader range of behaviour.

The contribution requirement, whilst novel, has been adopted in other common law jurisdictions in certain limited circumstances. There is little case law on the operation of contribution orders but the threshold of what is "just and equitable" seems to have developed as the appropriate test. However, given the obvious attack on the corporate veil, we see real difficulties with this suggestion being embraced.

Whilst director tracking may be a step too far, it is imperative that whatever is put in place can stop these activities before they happen as opposed to placing reliance on unfunded liquidators to enforce provisions which deserve a collaborative and "front-foot" approach from the regulators.


Submissions are open to the Government's proposals until 17 June 2017.

How it responds to the view of the public remains to be seen, however, insolvency reform is a "hot topic" at the moment. Whatever is ultimately put forward, it can be safely assumed that, given the upward shift in FEG payouts, any solution will be swiftly implemented

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.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions