Directors who are involved in multiple companies which have been placed into insolvency should have new restrictions placed on them, a report has found.
Releasing the final report of a three-part research project aimed at determining the best methods of addressing ‘phoenix’ activity, researchers at the Melbourne Law School and the Monash Business Law School have called for action across 25 areas to detect, disrupt and punish harmful and illegal activity.
Under one recommendation, anyone who has been an officer of five corporations which have either been considered under the Corporations Act to have failed or been deregistered by ASIC within a ten-year period would automatically be subject to restriction for a further five years.
Whilst under restriction, they would be limited to being a director of no more than five companies at any given time and both they and the companies on whose board they sit would be subject to increased reporting requirements.
These directors and their companies would also be top priority for regulators in terms of surveillance and inspection programs.
Directors who breach these conditions would subject to maximum fines of 100 penalty units (currently $18,000) and/or two years’ imprisonment.
They would also be subject to disqualification from ASIC to be a director for up to ten years.
The report also calls for ASIC to prioritise the use of its existing disqualification powers in order to disrupt and deter harmful phoenix activity.
At the moment, ASIC has an option to disqualify directors for up to five years where two of their companies have gone into liquidation and the liquidator has lodge a report pursuant to Section 533 of the Act.
Due in part to limited regulator resources, however, such disqualifications are relatively rare.
Widely considered to be a significant problem in the construction sector, phoenix activity involves situations whereby directors place a company into liquidation only to transfer the assets of the old company into a new company and begin trading under that new entity.
The result of this is that creditors of the old company are left holding debts owed by a company which has little or no assets from which to repay those debts.
Those who lose out can include employees, contractors/subcontractors, suppliers, lenders and taxpayers (through unpaid taxes which are owed).
The prevalence of this type of activity is significant.
Across all industries, ASIC says that almost 12,000 companies were identified for the potential to have conducted illegal phoenix activity whilst it had identified around 2,5000 directors who met the criteria for consideration to be disqualified who controlled more than 7,000 companies.
In construction, the Senate Inquiry into Construction Industry Insolvencies in 2015 suggested that more than three thousand possible cases of civil misconduct and 250 cases of possible criminal activity may have occurred in one year.
It should be noted that not all phoenix activity is illegal, and that phoenix activity is only illegal where it is performed in a purposeful effort to avoid paying liabilities.
- All company directors be issued with a personal identification number linking their past and present dictatorships
- An online and freely available register of restricted and disqualified companies be established
- Information about companies and directors should be made free and public
- The period for which directors can be disqualified be increased from five years to ten years
- Regulators other than ASIC also be given the power to disqualify directors.
- Penalties for those who manage companies whilst disqualified by increased
- Courts be given express powers to compel newly founded companies to repay old companies for gains it made through phoenix activity
Lead researcher Professor Helen Anderson said it was critical to give entrepreneurs a chance to learn from mistakes maintaining the ability to act against serial failures.
“We don’t want to penalise people running limited liability companies unless they’ve done something wrong,” Anderson said.
“Going into business involves some risk and we need to provide entrepreneurs with some protection. But we need to be able to identify and take action on the serial failures out there, whether people are doing it deliberately or not.”