Phoenix activity and director identification numbers
Illegal phoenix activity is a term that is often used when a new company is created to continue the business of a company that will be deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements. The Australian Government is making the prevention and punishment of illegal phoenix activity one of its top priorities.
A primary tool in this fight is the Phoenix Taskforce, which is a joint effort comprised of 35 agencies including the ATO and ASIC. Recently, prosecutions have occurred as a result of phoenix activity following the increased scrutiny of the taskforce.
Additionally, the government has reformed legislation in this space including:
- Introduction of the Insolvency Law Reform Act 2016 which changed the law relating to the registration and discipline of liquidators and the conduct of external administrations;
- Introduction of the Treasury Laws Amendment (2017 Enterprise Incentive No. 2) Act 2017 which focussed on honest business restructuring. This legislation creates a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency; and
- Introduction of the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 on 4 July 2019 which introduces a suite of new criminal offences and civil penalty provisions for company directors and other persons that facilitate ‘creditor-defeating dispositions’.
Proposed Bill to Combat Illegal Phoenixing
The proposed Bill sets out a new term, ‘creditor-defeating dispositions’ which, if passed, will be inserted into the Corporations Act 2001. A ‘creditor-defeating disposition’ is ‘a disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up’.
The Bill also proposes to set up new powers, including:
- Allowing liquidators to apply for a court order to make creditor-defeating dispositions voidable in certain situations;
- Allowing ASIC to recover company property disposed of or benefits received under a voidable creditor-defeating disposition for the benefit of the company’s creditors; and
- Preventing directors from improperly backdating resignations or ceasing to be a director where that would leave the company with no directors.
Director Identification Numbers
The reintroduction of the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill also foreshadows the likely reintroduction of proposed changes to amend the Corporations Act 2001 to introduce director identification numbers. This would see that each person who consents to being a director being assigned a unique identifier that they will retain even if their directorship ceases or they become a director of another company. It will allow traceability of a director’s relationships across companies and prevent the use of fictitious identities, whether accidental or intentional. It aims to monitor and deter phoenix activity as well as control and flag any repeated unsavoury behaviours of a director across different companies.
We recommend that all directors keep an eye on this space to see what changes are introduced.