Rising from the Ashes – A Fabled Tale Of The “Phoenix”
After several rounds of public consultation and a formal lapsing following the announcement of the most recent Federal election, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (“the Phoenixing Bill”) has risen from the ashes and is before the house of representatives once again.
But What Is “Phoenixing”?
You may be familiar with the fabled tale of the mythical bird who had a long-lived life, only to burn itself on a funeral pyre, but after, rose from its ashes in the freshness of youth and lived through another cycle of life. The phrases “Phoenixing”, “Phoenix Activity” and “Phoenixed” have become analogous terms in describing the deliberate winding up of a company in an attempt to avoid obligations to pay creditors whilst assets are generally shifted, free of liability, to a new entity that is established to operate the same or similar business as the one which was wound up.
The ‘cost’ of “Phoenix Activity”
Revenue and Financial Services Minister Kelly O'Dwyer was quoted by the Australian Financial Review last year estimating the economic hit as a result of “Phoenix Activity” was likely in the vicinity of $5 billion per year. Ongoing efforts by way of an established Government Phoenix Taskforce has seen hundreds of reviews and audits in business operations, resulting in millions of dollars of cash collected following an upward revision of tax liabilities. These operations have also been central in the prosecution of numerous Directors and Advisers for engaging in such behaviour.
Five Features of the Phoenix
The Australian Government originally announced the aim of the Phoenix Bill was to "deter and disrupt illegal phoenixing and more harshly punish those who engage in and facilitate this illegal activity". The pertinent aspects (not an exhausted list) of the draft legislation are:
- A Liquidator will be able to seek recovery and report offences for “Phoenix Transactions”;
- Directors will not be able to backdate resignations or resign where they are the sole director;
- The director penalty regime extends to account for personal liability for GST related liabilities;
- The ATO will be allowed to retain refunds in light of outstanding lodgements; and
- Broadening of ASIC’s powers to intervene and commence their own recovery action.
Restructuring professionals would agree the line between illegitimate “Phoenix Activity” and a legitimate business restructure is sometimes difficult to determine. There is, therefore, some cause to consider whether the ramifications of the Phoenixing Bill, in its current form, may result in an elimination of many appropriate and genuine restructuring options. Not only that, but the legislation seeks to introduce analogous provisions which are already at the disposal of liquidators and ASIC as regulator. For instance, liquidators already review and report breaches of director duties and potential “Phoenix Behaviour” to ASIC. In some instances, ASIC can determine whether to prosecute company officers and advisers or even fund a liquidator to conduct further investigations and gather evidence into alleged “Phoenix Behaviour”. Some observers are asking whether we actually need new legislation in this area or whether a more viable option would be to simply utilise existing powers better. Is the Phoenixing Bill simply a ‘look good’ to enhance public confidence in Government regulation?
The Phoenix Bill remains before parliament and no doubt our nation’s representatives will determine whether a raft of new laws is the most appropriate mechanism to deter the illegitimate emblem of immortality known as “Phoenixing”. Advocates may consider, however, when it comes to combatting illegitimate “Phoenix Behaviours”, a new weapon may be as good as a sharpening of the sword.
In light of ongoing changes to the restructuring industry, should you have queries on how this may affect your business or future transactions, please do not hesitate to contact your trusted adviser at PKF.