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28 Sep 2017

Directors to be tracked with an Identification Number


4 min

Advisors must ensure their clients’ activities are not ‘in-flight phoenix’.

The Federal Government is working on introducing a Director Identification Number (DIN) for individuals to use when seeking to incorporate a company to reduce phoenix activity. The DIN will enable government agencies and databases to track company directors and their relationships to other companies and people. The new laws will also target “pre-insolvency advisors” who assist in carrying out illegal phoenixing.

Phoenix companies are a major economic problem in Australia and has resulted in several project teams being formed over recent years to investigate ways to better mitigate phoenix activity’s impact. Now, more than ever, directors are using phoenixing as a means of dodging financial obligations, and to date, there has been a lack of controls to temper and punish this behaviour.

With over $3 billion estimated to be lost every year from phoenix activities in the form of unpaid employee entitlements, superannuation, GST and other payments intended for governments, councils, suppliers and other businesses: regulatory bodies have created a multi-agency taskforce charged with disrupting and stopping illegal phoenix activity. Last month, The Sydney Morning Herald, reported that the Australian Securities and Investments Commission (ASIC) has identified 11,500 potential phoenix operations. And that the Australian Taxation Office (ATO) told a Senate inquiry “that as many as 20,000 companies may be building their wealth through ‘fraudulent phoenix behaviours’.

The 20-agency team includes the Australian Federal Police, Australian Crime Commission, State Revenue Offices, Fair Trading and Fair Work Ombudsman, the ATO, and ASIC that share information and activity to implement a new set of tactics termed “in-flight phoenix”.

But what is a phoenix?

Project Phoenix—­this research and consultative investigation into phoenix activity and solutions for its prevention, define a phoenix as:

One company taking over the business of another company that is wound up or abandoned. It is a situation where the controllers of both companies are the same people or their associates with the new business arising from the ashes of old one having shed debts and other obligations.

It is important to understand that not all phoenixes are illegal. Project Phoenix has categorised phoenix activity into three main types:

  • Legal Phoenix—a business rescue that gives a better outcome for creditors and society in the business continuing to operate rather than the end of the business. Usually, this is achieved through the voluntary administration process under the Corporations Act 2001.

  • Problematic Phoenix—repeated resurrection of a business by inadequate management. Controller/s tend to be individuals with poor business skills who are unwilling or unable to learn a lesson. There is no intention to defraud but the outcome is usually the repeated avoidance of debts such as unpaid monies owed to the ATO and/or state revenue taxes.

  • Harmful Phoenix­—illegal and involves the unpremeditated or premeditated intention to defraud creditors, which may also include other illegal activity.

What does this mean for advisors?

Advisors and their clients must be aware of ‘problematic’ and ‘harmful’ phoenix types (two and three above). The regulators will most likely be closely monitoring these types of activity or “restructure”.

With the multi-agency taskforce being introduced and its sophisticated data matching tools being used, advisors should expect additional scrutiny of the financial obligations of directors, companies and their corporate structures. The non-lodgement of statutory obligations (GST remittance/stamp duty payments) is now in focus.

What has been the flow-on effect to insolvency appointments?

Combined with this change in law, at Worrells, we have seen a markedly improved recovery action taken by the government departments both through quicker enforcement times and in taking an active role as creditor in insolvency appointments. We are urging advisors to ensure their clients have various knowledgeable and appropriately qualified advisors—accountants, solicitors, and insolvency practitioners—engaged in their businesses; and to complete their financial affairs and lodgements: correctly and on time.

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