Illegal phoenix activity – government determined to expand crackdown efforts
Have you ever been owed money by a company, but when you attend to calling in your debt, the company suddenly has no assets and has been deregistered?
This is a trick of the trade where a new company is registered to take over an insolvent or failed company. This can be legal, where the directors have genuinely managed the business responsibly, but the business has failed and an external administrator becomes involved.
However, illegal phoenix activity is where a company is deliberately stripped of assets and deregistered to avoid paying creditors and having the company’s assets liquidated to pay creditors. Of particular concern is the use of serial deliberate insolvency as a business model to avoid paying company debts.
Cost of illegal phoenix activity
In 2018, a report into illegal phoenix activity estimated that in 2015-2016, the annual cost of illegal phoenixing to businesses, employees and the government was between $2.85 billion and $5.13 billion. (See The Economic Impacts of Potential Illegal Phoenix Activity.)
One of the costs of illegal phoenix activity is the competitive disadvantage suffered by honestly run businesses which pay their debts. Other costs include non-payment of employee entitlements, non-payment of suppliers and loss of government revenue.
ASIC’s role in ensuring integrity of markets and prosecuting for breaches
The Australian Securities and Investments Commission (ASIC) is the independent Australian government body which controls and regulates the corporate, financial services and consumer credit markets.
ASIC has powers to register and deregister companies, make rules to manage and ensure integrity of the markets, investigate suspected breaches of the rules, issue infringement notices, grant relief under various legislative provisions, seek civil penalties from the courts for breaches and commence prosecution proceedings against those who ignore the rules. (For more information, please see our 2022 article Lifting the corporate veil.)
Reforms designed to boost efforts to combat illegal phoenix activity
On 13 February 2019, the government introduced the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. This is a package of measures to help combat illegal phoenix activity.
This legislation will introduce new offences and penalties specifically targeting those who deliberately avoid paying their debts by transferring assets and deregistering spent companies. These measures will extend to those who facilitate such activities, including unscrupulous advisers, accountants and lawyers who advise companies on how to engage in illegal phoenix activity.
The new legislation will impose civil and criminal offences, and those who carry out these illegal activities will be faced with the highest penalties available under the law.
The reforms will make it easier to claw back transferred assets. Directors will be forbidden to back date resignations, a sole director will be unable to resign and abandon the company as a hollow shell without a director and directors will be personally liable for their company’s tax liabilities.
The Australian Taxation Office (ATO) will be given power to retain tax refunds where the company’s tax lodgements are outstanding. The reforms will also restrict voting rights of related creditors to appoint or remove external administrators.
General public encouraged to report illegal phoenix activity
ASIC relies on liquidators and the general public to inform it of illegal activity. You can make a complaint to ASIC by phone to the Phoenix Hotline on 1800 807 875, by email at firstname.lastname@example.org or by completing an online form on the website of the ATO.
ASIC will not investigate all complaints, but it will investigate serious breaches that will have an ongoing effect on the integrity of the market.
If you suspect that you have a debtor who has or may have engaged in illegal phoenix activity, you should talk to your lawyer first. There may be alternative ways to recoup your debt, such as commencing action against the company directors personally. Your lawyer will be able to advise you whether this is an option for you.
For more information, please see our November 2021 article Company directors on a deadline to get their director ID number.