Phoenix flames further doused.
Illegal phoenix activity in business is a well-known concept and the government has been trying to combat it for decades.
As an insolvency practitioner I see first-hand how illegal phoenix activity affects both the business and the wider community through:
- non-payment of wages, superannuation and other employee entitlements
- unfair advantage over other businesses
- non-payment of creditors including the Australian Taxation Office (ATO)
- avoidance of regulatory obligations.
Following the 2014 Productivity Commission's recommendations being implemented, the Phoenix Taskforce was established, which now comprises 35 federal, state/ territory government agencies, including the ATO, Australian Securities and Investments Commission (ASIC), Department of Jobs and Small Business and the Fair Work Ombudsman. The Phoenix Taskforce has developed sophisticated data matching tools to identify, manage and monitor suspected illegal phoenix operators. As a result, several prosecutions and convictions of those undertaking this illegal activity have already been obtained including:
- A director of a Perth-based earthmoving, garden supplies and property development business was sentenced to five years and three months' jailtime for defrauding the Commonwealth of $6.7 million in unremitted taxes. He was also bankrupted following an investigation into his personal tax affairs and precluded from being a company office holder.1
- A director of a Sydney-based asbestos removal company was sentenced to a one-year, $500 good behaviour bond and ordered to pay $22,000.00 in reparation.2
- A director of a New South Wales-based property services business was sentenced to 18 months' imprisonment and released on a recognisance order to be of good behaviour for two years. 3
- A director (as a franchisee) of a Tasmanian-based fast-food business was sentenced to two months' imprisonment, which was wholly suspended conditionally that no reoffence occurs for 12 months.4
By virtue of these convictions, those directors are automatically disqualified from managing corporations for five years from the date of conviction.
However, there's more legislation to follow.
The Combatting Illegal Phoenixing Bill5 was reintroduced into Parliament on 4 July 2019. By all reports, it seems that the relevant industry bodies/agencies expect it to pass both houses swiftly. To summarise, the Bill's amendments serves to:
- Introduce new criminal offences and civil penalty provisions for company officers that fail to prevent the company from making creditor-defeating dispositions6 and other persons facilitating those dispositions.
- Allow liquidators to apply for a court order regarding a voidable creditor-defeating disposition where the company was insolvent at the time (or became insolvent because of the transaction) or where the company entered external administration within 12 months of the transaction.
- Enable ASIC to make orders to recover, for the benefit of a company's creditors, company property disposed of or benefits received under a voidable creditor-defeating disposition.
- Prevent directors from improperly backdating resignations or ceasing to be a director that leaves a company with no directors.
The legislation will put advisors who facilitate illegal phoenix activity firmly in the regulator's cross hairs with the introduction of new civil and criminal liability provisions.
Other amendments contained in the Bill are contingent on the commencement of :
- The Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019.
- The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 .
The new legislation further strengthens the ongoing "war" on illegal phoenixing which includes the already implemented changes such as:
- The ATO's Phoenix Taskforce and reporting forums (tip-off forms, hotline—1800 060 062, and email PhoenixReferrals@ato.gov.au).
- An additional $8.7 million over four years from 2018–19 to increase funding for the Assetless Administration Fund. The additional funding is intended to increase ASIC's ability to fund liquidators, who play a vital role in investigating and reporting illegal phoenix activity.
And the proposed changes to:
- amend the Corporations Act 2001 to introduce director identification numbers (DINs); and
- extend the estimates and director penalty regime to company GST liabilities, luxury car tax (LCT) and the wine equalisation tax (WET).
This article serves to raise the awareness around the ever-evolving law and government initiatives to tighten the net around illegal phoenix activity. Your local Worrells Partners are qualified and experienced to give proper advice to businesses in financial distress seeking a legitimate restructure. Our initial advice is complimentary, confidential and without obligation.
2 ASIC media release, 19-131MR, 5 June 2019.
3 ASIC media release, 18-246MR, 24 August 2018.
4 ASIC media release, 18-101MR, 12 April 2018.
5 Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019
6 This is a new term that will be inserted into the Corporations Act – section 588FDB.
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.