Australia, Professional Services

Government’s phoenix rules given “no chance” of succeeding

Government's phoenix rules given "no chance" of succeeding

The government said its reforms would “deter and disrupt the core behaviours of illegal phoenixing”, which involves transferring the assets of a failed company to another company that has no liabilities.

The key elements of the government’s draft legislation are:

  • Creating new phoenix offences to target those who engage in and facilitate illegal phoenix transactions.
  • Preventing directors from backdating their resignations to avoid personal liability.
  • Preventing sole directors from resigning and leaving a company as an empty corporate shell with no directors.
  • Restricting the voting rights of related creditors of the phoenix company at meetings regarding the appointment or removal and replacement of a liquidator.
  • Making directors personally liable for GST liabilities, as part of extended director penalty provisions.
  • Extending the ATO’s existing power to retain refunds where there are outstanding tax lodgments.

However, the government’s draft legislation loses sight of what a reform package should be about.

There is no chance that this will dent the scale of phoenix activity in Australia. Phoenix operators will be able to continue business as usual with minimum fuss.

Fair play to the government for these reforms, but what about the big picture? For example, the policing of phoenix activity is still left to ASIC and company liquidators – both of whom are underfunded and don’t have much of a track record for pursuing phoenix activity.

What has really changed? Not much. There isn’t any funding for regulation and there isn’t a definition of what phoenix activity actually is. If a liquidator has no funding when they’re appointed, no one can compel them to investigate and pursue phoenix activity.

Prominent academic research has also been highly critical of the government’s approach to phoenix activity in the past.

A well-respected group of academics called the Phoenix Research Team recently produced three important research papers into phoenix activity. They called for a new definition of phoenix activity, active enforcement and new legislation. The key recommendations have not been pursued by the government.

I predict a small change but the difficult choices that the Phoenix Research Team recommended have not been followed by the government. The government hasn’t even defined phoenix activity in the legislation. Serious researchers of phoenix activity know that more specific legislation and policy are required.

Ben Sewell is principal of Sewell & Kettle. Contact: bsewell@sklawyers.com.au

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