THE RISE OF THE PHOENIX CORPORATES GO INCOGNITO

Lawyers Sunshine Coast The regular tribulations of the Global Financial Crisis in the guise of unemployment and financial struggles have been dwarfed by a more sophisticated evil. Fraudulent activities and organized misbehavior disguised under a trend, known as Phoenix activity, although not a new trend, is gaining momentum in Australia in recent times. What is Phoenix activity? Phoenix, the largest city in the US, also known as the Valley of the Sun and the Phoenix activity in Australia, echo the same philosophy to the mythological creature. The emergence of a new entity through fire and difficult times resurfaces to live again and start afresh. These Phoenix companies are revived by directors who transfer assets of an indebted company into a new company, with a similar name and identical activities of the previous company, doing business incognito but essentially are run by the same directors. Further, the directors place the initial company into administration or liquidation with no assets to pay creditors, whilst enjoying the fruit of the Phoenix or new company. However, ASIC has been quick to catch on to such fraudulent gimmicks. It has been successful in removing 40 directors from office who have intentionally avoided their responsibilities and have defrauded their creditors. The Australian Taxation Office and Treasury fear annual costs to be around $700 million to $1.3 billion in resolving these cases. An enforcement program is in place, which is funded by the Assetless Administration Fund. ASIC Chairman, Mr Jeffrey Lucy, explained that the purpose of the Fund was to assist liquidators to discharge their duties in conducting thorough investigations and compiling reports, which would enable ASIC to implement enforcement proceedings. However, this is not enough. Bridging the regulatory gap, protecting creditors and discouraging Phoenix activity, needs more stringent strategies in place. Whilst the Fund and the Corporations Act, among other statutory sources, serve in achieving these objectives, the Treasury has proposed stricter changes, which if implemented, will significantly alter the personal liability of directors. The proposed paper, Action Against Fraudulent Phoenix Activity , recommends several key changes. To cite a few, for instance, the current taxation rules entitle the Commissioner to preempt tax liabilities by requesting a bond from a director where he foresees or considers a risk of Phoenix activity. The new rules recommend widening this preemption by including other liabilities. Further, a high penalty is also to be imposed for failing to provide such a bond.

Other changes apply to payment of liabilities. For example, the Director Penalty Notice is to be replaced with an automatic penalty and personal liability on the director after 3 months from the due date for payment of statutory liabilities. Earlier, directors were liable for just PAYG. Under the new regime, directors will also be held personally labile for outstanding superannuation, GST, excise and income tax. The ideal outcome would be for a reduced number of Phoenix activities and directors who are more honest and diligent in their conduct and duties. Until this positive change completely sets in, ASIC will continue intervening but earlier on this time with the help of the stricter proposed rules, the Assetless Administration Fund and the information provided by liquidators. Directors, instead of feeling scared and threatened should view these changes positively and seek to turn around their companies and avoid severe legal penalties. ASICs surveillance initiative ensures that company officers barred from running their companies comply with their disqualification or else they will face the threat of criminal proceedings. It has been a little over a year since the Global Financial Crisis. The Australian economy is emerging boldly. This should inject a new impetus to companies and directors who are struggling to provide opportunities for genuine growth and trade and to discourage any unwanted Phoenixes. On the one hand, strict rules will punish dishonest directors but the innocent ones along with their creditors may wrongfully and unfairly bear the brunt of such a strict regime. About Author: Sajen legal is a specialist insolvency lawyer firm and specialist in company disputes resolution management. Director Kyle Kimball leads a professional advice team that thinks differently.