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The corporate regulator says it’s difficult to prosecute dodgy executives who engage in “phoenix activity” because they often fail to keep company records.
Phoenix activity refers to executives who strip down their businesses and transfer assets to another company to avoid paying outstanding liabilities. It sees companies collapse under debts only to rise “like a phoenix from the ashes” under a new name.
Australian Securities and Investments Commission’s John Price told a parliamentary committee on Friday phoenix activity could be legal when a company was being restructured, or illegal if the director intended to rip off creditors.
Illegal phoenix activity had a significant impact on small business and could cost the community between $2.8 billion and $5.1 billion, Price said. He added that illegal phoenix activity was difficult to prove as it was a matter of intent.
“Not too often do you get people ill-advised enough to leave a paper trail that demonstrates what that intent is.”
ASIC has prosecuted more than 300 individuals over the last financial year for failing to keep books and records, and 43 directors were suspended for suspected illegal phoenixing.
The government is moving to stamp out illegal phoenix activity, with draft legislation released this week by Treasury and a hotline to report dodgy operators set up last month.
Last financial year, the tax office sent out tax bills totalling more than $270 million from more than 340 reviews and audits of businesses involved in phoenix activity.
Price said there was also enormous benefit to introducing director identification numbers, which would allow agencies and regulators to map the relationships between individuals and entities and individuals and other people.
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, said the proposed package of reforms in the draft legislation clearly identifies which activities, in the course of transferring assets, are illegal.
“The focus on company directors is essential. Directors won’t be able to transfer company assets that affect creditor payments, and they won’t be able to backdate resignations to avoid liability or leave the company as an empty corporate shell,” Ms Carnell said.
“Of particular significance, pre-insolvency advisers and other facilitators will be on the radar and penalised for dodgy company asset transfers. Holding the facilitators accountable will reduce access to the specialist knowledge required to deliberately liquidate an entity with the intention to operate and profit through other trading entities.
“The list of proposed reforms will help minimise the impact on small businesses suffering at the hands of Australia’s phoenixing. Coupled with the proposed statutory trusts model and the director identification number, we will see genuine protection for subcontractors,” Ms Carnell added.
“Currently, if there is any money left, secured creditors come first, the employees are paid wages owing out of the federal government’s FEG (Fair Entitlement Guarantee) and the subbies are left with nothing. We look forward to lodging a constructive submission that will complement the draft legislation and expand on measures to deter and disrupt the core behaviours of illegal phoenixing.”