The Government announced in the Budget this week that it will reform the corporations and tax laws and provide the regulators with additional tools to assist them to deter and disrupt illegal phoenix activity.
This follows on from the Government’s announcement on 12 September last year that it is taking action to crack down on illegal phoenixing activity that costs the economy up to $3.2 billion per year.
What is phoenixing?
Phoenixing is the stripping and transfer of assets from one company to another by individuals or entities to avoid paying liabilities. It hurts all Australians, including employees, creditors, competing businesses and taxpayers.
What is the planned DIN reform?
The Government intends that its package of reforms will include the introduction of a Director Identification Number (DIN) and a range of other measures to both deter and penalise phoenix activity.
The DIN is expected to identify directors with a unique number, but it will be much more than just a number. The DIN will interface with other government agencies and databases to allow regulators to map the relationships between individuals and entities and individuals and other people. Just like the nation state predicted in George Orwell’s book ‘1984’, the Government’s DIN plans appear to resemble the conversion of the Australian Nation into Airstrip One.
What are the other planned measures?
In addition to the DIN, the Government will consult on implementing a range of other measures to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers. Hopefully the ‘wild west’ days of the pre-insolvency advisors are numbered.
First, specific phoenixing offences to better enable regulators to take decisive action against those who engage in this illegal activity.
Secondly, the extension of the penalties that apply to those who promote tax avoidance schemes to capture advisers who assist phoenix operators.
Thirdly, stronger powers for the ATO to recover a security deposit from suspected phoenix operators, which can be used to cover outstanding tax liabilities, should they arise.
Fourthly, making directors personally liable for GST liabilities as part of extended director penalty provisions.
Fifthly, preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors.
Sixthly, prohibiting related entities to the phoenix operator from appointing a liquidator.
The Government also plans to consult on how best to identify high risk individuals who will be subject to new preventative and early intervention tools. For example, it will consider a next-cab-off-the-rank system for appointing liquidators to break the chain of causation involving pre-insolvency advisors developing referral relationships with voluntary administrators and liquidators that often give rise to grounds for an apprehended lack of independence in relation to their voluntary appointment.
In its announcement this week, the Government also confirmed that its reform package will restrict the ability of related creditors to vote on the appointment, removal or replacement of the voluntary administrator or voluntary liquidator.
Effective reform and enforcement in this area is well overdue. The benefits will be far reaching if the Government designs its reform package in a way that it is fit for purpose.
Whilst we must all await the details, it would be useful to add an enforcement capability to the powers of liquidators to recover compensation for the general body of creditors and not just ‘beef up’ the ATO’s powers as an implicitly ‘preferred’ creditor.