Introducing the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019.
You’d be forgiven for thinking that the discussion about illegal phoenix activity only started in the last five or six years. But back when we first heard Tom Cruise as Jerry Maguire yell “Show Me the Money”, the then Australian Securities Commission published a report in 1996 named: ‘Phoenix Companies & Insolvent Trading’.
Momentum gathered in 2009 when the Australian Treasury produced the report ‘Action against fraudulent phoenix activity’, and again in 2012 when PricewaterhouseCoopers (PwC) issued ‘Phoenix Activity: sizing the problem and matching solutions’.
However, this issue didn’t really start hitting the radar until the Phoenix Taskforce was created in 2014. Headed by the Australian Taxation Office (ATO) and now encompassing 38 federal, state and territory government agencies, the taskforce employed data matching tools and new information sharing practices to shed some light on exactly how the activity was occurring.
Earlier reports were based only on anecdotal evidence, including surveys of insolvency practitioners and stakeholders, but new data was painting a more accurate picture of the problem. The University of Melbourne produced three reports during 2014–2017 as part of its ‘Regulating fraudulent phoenix project’, and PwC added another report in 2018 titled ‘The economic impacts of potential illegal phoenix activity’. Then we started to see some more accurate estimates around the cost of this activity to the Australian economy, and some suggestions on how to deal with it.
PwC estimated a total cost of between $2.85 and $5.13 billion, which was made up of:
- cost to business in unpaid trade creditors: $1.162bn - $3.171bn
- cost to employees in unpaid entitlements: $31m - $298m
- cost to government in unpaid taxes and compliance costs: $1.660bn.
With numbers like that you can see why legislators were compelled to try to curb the activity.
Despite its name ‘Treasury Laws Amendment (Combatting Illegal Phoenixing) Act’, and all the media releases and discussion surrounding its introduction, the law does not actually define phoenix activity (legal or illegal). PwC perhaps hit the nail on the head in their 2018 report when it said:
It has historically been difficult to determine a single agreed definition of phoenix activity (and what constitutes illegal or fraudulent phoenix activity) in Australia.
So while the ATO, the Australian Securities and Investments Commission (ASIC) and other regulatory bodies each have its own definitions, we must look at the new law—which is mostly a suite of additions to various pieces of existing law—to see how efforts are being made to stamp out this conduct.
The legislation came into effect on 18 February 2020, but not all parts are effective from that date.
Creditor defeating dispositions
At first blush you’d think this new voidable disposition in the Corporations Act 2001, (effective 18 February 2020), was essentially the same as the existing uncommercial transactions provisions. But upon a deeper dive there are a few gems:
- Not only can liquidators now seek to overturn the sale of assets at less than market value, but so can ASIC on its own initiative.
- The company doesn’t have to be insolvent at the time or as a result of entering into the transfer.
- The penalty provisions don’t even require the company to be in liquidation for the directors and those advisors who facilitate the transfer to be prosecuted.
When is the resignation of a director effective? Well from 18 February 2021 it will be dependent on when you lodge the resignation with ASIC. If lodged over 28 days after resignation, then the date of lodgement is the date of resignation. So, don’t be late in lodging or you will need to apply to ASIC or the court to fix it up.
Changes to the DPN regime
From 1 April 2020, the ATO director penalty regime has extended personal liability to include GST, WET, and LCT.
Director identification number
Directors are now required to be verified before being recorded as a director. This new system is expected to take up to two years to implement and will unify 31 business registries that ASIC currently maintains into one registry maintained by the Australian Business Register (ABR).
Time will of course tell whether these changes curb illegal phoenixing (no matter how you wish to define it).
 Goods and services tax (GST), wine equalisation tax (WET), and luxury car tax (LCT).