Combating phoenix activity

We have spoken before about phoenix activity and government attempts in the past to crackdown on the illegal activity:

• New scheme to prevent subcontractor rip-offs
• Alleged misrepresentations and unconscionability in the training industry

The Federal Government is now calling for submissions for Combatting Illegal Phoenixing.

Phoenix activity takes place when corporations are illegally misused as a way to avoid debts and, in some cases, facilitate money laundering. If a company is unable to pay its debts, the controlling directors act in a manner which denies creditors access to the entity's assets to meet the unpaid debts.

The Government’s consultation paper raises the following ideas for discussion.

1. A single (anonymous if required) Phoenix Hotline that would have improved sharing and distribution of information among a number of Government Agencies.
2. The Corporations Act may be amended to declare a transfer of assets void as against a liquidator so that assets could be clawed back in liquidation.The position would be rebuttable, but in essence, the amendments would be based on Bankruptcy laws that state “if it can be reasonably inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become insolvent”, the transmission of assets could be voided.
3. Introduction of a specific offence that would enable creditors, liquidators and the ASIC to sue for compensation against any person knowingly involved in illegal phoenix activity – including directors and advisers.
4. Giving ASIC power, upon request of a liquidator, to issue a notice upon the Company that received assets, to deliver up the property or money to the liquidator.To set this aside, the recipient would have to apply to court and explain the circumstances of the asset transfer.
5. In addition, civil and criminal penalties would be introduced to apply to illegal phoenix activity including against directors and their advisers.
6. The failure to provide a liquidator with books and records of a Company would be considered a Designated Phoenix Offence and directors of these companies would be deemed Higher Risk Entities and subject to heightened scrutiny.
7. Imposing a rebuttable presumption that where a change of director notice/resignation is lodged more than 28 days after the resignation, the director is still to be held liable for any misconduct that occurred up to the date of lodgement.Also, the onus for reporting directors’ resignations to ASIC may be shifted from the company to the resigning director.
8. So as to avoid abandoned companies, laws may be amended so as not to allow a director in a single director company to resign without finding a replacement or placing the company into liquidation.
9. Restriction of voting rights of related parties at Meetings of Creditors so that if creditors wish to replace an incumbent liquidator, they can do so without being impeded by related parties votes.
10. Extending Promoter Penalty laws introduced in 2006 to specifically target promoters or facilitators of illegal phoenix activity such as pre-insolvency advisers, business consultants and repeat shadow directors.
11. Extending the Director Penalty Notice regime to include GST.
12. Increasing the ATO’s powers in relation to security deposits and garnishees in relation to high risk operators.
13. Improved identification and early detection measures of those that are to be considered a high risk of engaging in Illegal Phoenix Activity.A person may then be designated as either a “High Risk Entity” or a “High Risk Phoenix Operator” both of which would carry restrictions involving such things as the lodgement of self-assessed tax returns and the ability to select their own liquidator.These designations would be triggered at certain thresholds such as where the person;

    - Has previously been disqualified as a director.
    - Has been involved in 2 or more failed companies within the previous 7 years where;
    - There has been a failure to keep and provide adequate books and records to the liquidator
    - Where a negative report about the person has been lodged by the liquidator
    - Has been found to have committed an Illegal Phoenix Offence
    - Has a poor regulatory compliance history that is consistent with suspected Illegal Phoenix Activity
    - Is declared as a High Risk Phoenix Operator by the ATO

14. Appointing liquidators on a regionally based, Cab Rank Basis, to any company deemed to be a High Risk Phoenix Operator so as to avoid any possibility of a breach of independence or an improper relationship or influence between a phoenix facilitator and the liquidator.Liquidators of no fund companies of this nature only would be remunerated via an industry levy on corporations to ensure basic investigations are conducted.
15. The establishment of a Government Liquidator to conduct small to medium sized liquidations with the option of appointing a private liquidator if circumstances warranted it.
16. Removal of the current 21 day waiting period for a Director Penalty Notice for companies deemed High Risk Phoenix Operators.

Changes to the ATO’s power that would allow it, in the case of high Risk Phoenix Operators, to retain refunds due to a Company until all returns have been lodged.

The full Consultation Paper can be accessed here.