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PKF Australia

Accountants and Business Advisers

Illegal Phoenix Activity Affects So Many Australians: Directors Sitting Pretty!

Illegal Phoenix Activity Affects So Many Australians: Directors Sitting Pretty!

Posted 21 Aug 14 by Hugh Milne

Illegal fraudulent phoenix activity affects hundreds of Australian workers every year. This occurs when a company folds leaving debts outstanding, while business assets are transferred to a new company that often trades under a similar name, with the same or a related director.

ASIC Commissioner Greg Tanzer notes, 'Illegal phoenix activity has far reaching and unfair consequences'. Employees are usually left with unpaid wages and entitlements and creditors are left with nothing but debt. Tax revenue is also affected with unpaid tax liabilities usually left behind.

There are adverse consequences for directors who misbehave.

So what does illegal phoenix activity involve?

Please don't assume that all companies that fold are involved in phoenix activity! Some companies do genuinely fail (unfortunate as that is).

Illegal phoenix activity occurs when those in control of companies (directors) deliberately shut down the indebted company to avoid paying creditors. They transfer some or all of the assets to another company and then use this new company to conduct the same type of business as the failed company.

Some of the key characteristics of illegal phoenix activity includes:

The company is unable to pay its debts,

  • A new company starts up using some or all of the assets of the former business and controlled by people related to the management or directors of the previous company (usually within 12 months)
  • The old company is an assetless shell leaving creditors with no access to funds

How does illegal phoenix activity impact the Australian Economy?

A major downside of illegal phoenix activity is that it costs the Australian economy more than $3 billion annually.

The breakdown of this figure includes:

Up to $655 million for employees

  • Up to $1.93 billion for businesses who have provided goods and services but remain unpaid
  • Up to $610 million for government revenue, mainly in the form of unpaid taxes

So while company directors who have been participating in illegal phoenix activity are sitting pretty, it's the employees, service/good providers and the Australian Taxation Office who have been hit hard.

What is being done about illegal phoenix activity?

The Australian government, in an attempt to regulate illegal phoenix activity, has formed the 'Inter-Agency Phoenix Forum'. 13 Commonwealth government agencies are involved, including ASIC, the ATO, Australian Crime Commission and the Fair Work Ombudsman.

ASIC is the main agency that investigates illegal phoenix activity and conducts reviews of liquidations. To combat phoenix activities, it may ban directors who have been involved in 2 or more failed companies from acting as a director of any company. The bans are typically for two years.

For example, in a recent surveillance program, ASIC focussed on the building and construction, labour hire, transport, security and cleaning industries. 1,400 companies were reviewed with special attention being paid to over 2,500 directors of those companies at the time they were shut down. Many of the companies reviewed were from the small business sector and there had been allegations of illegal phoenix activities. Many of the companies had failed for genuine, commercial reasons. But those directors identified as participating in phoenix activity were selected for special scrutiny with a view to banning them from acting as directors.

Looking forward - ASIC Initiatives.

Company Directors involved, or considering being involved in illegal phoenix activity, should think carefully as ASIC is on the case!

It is paying special attention to individuals who are directors of new companies that were also directors of other companies being wound up.

Four major initiatives of ASIC are:

1. Funding Liquidators:
The Australian Government established the Assetless Administration Fund that is administered by ASIC. Liquidators prepare and lodge reports with ASIC who then considers whether to take action against directors.

2. Disqualifying directors:
Liquidators supply ASIC with statutory reports to support decisions to disqualify directors from managing corporations. These directors have usually managed companies that have been involved in 2 or more liquidations over 7 years.

3. Liquidators Assistance Program:
ASIC works with liquidators to secure books and information of companies in external administration by making sure that the directors comply with their legal obligations. Directors that fail to meet their obligations may face court action.

4. Identifying and deterring illegal phoenix activity:
As previously noted, in July 2013, ASIC launched a new surveillance initiative aimed at deterring illegal phoenix activity in certain industries where allegations have been made.

ASIC will continue to monitor allegations of illegal phoenix activity across Australia. No industry is safe from being scrutinised and company directors with a history of failed companies will be put under surveillance. Ultimately, awareness needs to be raised about illegal phoenix activity to protect the livelihood of Australian workers and to save the Australian economy much needed money. With ASIC on the case, there is no escape!


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