Phoenix activity in Federal Government's sights

The Federal Government recently announced that it will be launching a package of comprehensive reforms to crack down on illegal phoenix activity. This is a welcome initiative as phoenix activity comes at a large cost to the Australian economy and companies that engage in phoenix activity enjoy an unfair competitive advantage compared to law abiding companies.

What is phoenix activity?

There is no statutory or legal definition of phoenix activity. ASIC notes that fraudulent or unlawful phoenix activity usually involves:

• the transfer of assets of a company (such as the business) to another company in circumstances where the company that made the transfer:
  • was unable to pay its debts when due; and
  • may have been managed to deprive unsecured creditors equal access to its assets; and
• there is a link between the management and shareholding of the two companies.

Why is it a problem?

The Federal Government has stated that illegal phoenix activity costs the economy up to $3.2 billion per year. Phoenix activity affects creditors, employees, competing businesses and taxpayers as it is orchestrated to leave behind an empty shell, ultimately leading to the likely liquidation of the entity with limited returns (if any) to creditors and forcing employees to look to the Commonwealth-funded Fair Entitlements Guarantee scheme to recover their entitlements.

What is being proposed?

The announcement did not include any new legislation or proposed amendments to existing legislation. It did, however, refer to a "comprehensive package of reforms" to address phoenix activity. It has been reported that the reforms will include:

• introducing a Director Identification Number (a unique number that will allow regulators to have greater oversight of the relationships between individuals, entities and other people);
• introducing specific phoenix offences;
• extending the penalties that apply to advisers who promote tax avoidance schemes to capture advisers who assist phoenix operations;
• making directors personally liable for GST liabilities; and
• forbidding related entities to a phoenix operator from appointing a liquidator.

Where to from here?

Consultation on the reforms is set to commence shortly. We welcome the proposal and will continue to monitor any developments in this space.