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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.”

 
  • Change is needed for sure. My company was caught out when Hewatt Pty Ltd went into voluntary administration on a defence site project. Despite meeting with Lend Lease and defence 2 months prior and giving notice invoices were going unpaid and overdue no action was taken. ASIC allowed Hewatt to register 3 new companies whilst 3 were under DOCA on administered companies. End result Hewatt walks away from 33 million to unsecured creditors and trades on under new company with half his old gear. Constant requests for validity of Statutory declarations to be checked has gone unanswered by various government departments when fraud was most likely committed against federal government. Have documentation to support my claims, invoice 4 months overdue for example

  • Whilst we applaud the move – it doesn't protect the revenue of subcontractors , When will people learn that their significant unsecured revenue built up in the bank accounts of builders is the target of the Phoenix. If the revenue is secured in construction trusts then there is nothing to phoenix .
    That is the reason why the use of trusts is opposed – to allow the innocent and those who do the work to be defrauded. Everybody is a winner by parasiting on the hard work of others .

  • 44 recommendations came from the senate inquiry – they wax lyrical about phoenixing but do absolutely nothing to fix it . Matter of fact recent changes to the Corps Act legalized it.

    We hsve industry association executives on anti Phoenix task forces whose members are Australia 's largest beneficiaries of phoenicing , In other words they have no intention of stopping this insidious practice that nets these parasites $3 billion / year.

  • Thanks for this update Andrew. There was research undertaken by academics from the University of South Australia in 2016 – it demonstrated that the normally quoted figure of the construction industry being responsible for 25% of insolvencies is incorrect, This is because the 60% of sole trader insolvencies are not counted. Thus the figure is more like 50%!

    It is way past the time for action. The argument about 'entrepreneurship is a furphy. As Les Williams highlights, it is the small sub-contractor businesses in the construction industry that are the biggest losers – around $20 Billion annually! Then of course consumers lose out badly – their loss from defective/incomplete work and insolvencies is a staggering $40 Billion annually. Then there are the workers who lose their jobs (at the company and in the small business sector) and all the flow on effects to the community. WE have a human tragedy and on a massive scale.

    At present, the 'systemic failure' delivers massive damage – and it is always to those who fund the industry and do all the work. These are the people who are voiceless, not represented anywhere at any political table. In stark contrast, the 'parasites' that Les refers to make mega fortunes through what is in reality 'legalized fraud'.

    I would be interested to hear from Mark in relation to the Hewatt story. This story is repeated over and over – millions of people have been damaged, many so devastated that they have lost their lives – literally and figuratively.

    WE need to stop what is deliberate phoenixing – now endemic – and give the real stakeholders a fair go at building a home – getting what they pay for, running a business – and getting paid, and providing workers with proper jobs, protection from injury, disease and death and job security. The root cause is greed. Achieved by the big vested interests directing Govt policy and being enabled to legally rob all across the Australian community.

  • The proposals here are fine – but professional advice tells us that in the construction industry it will have little effect. Walton phoenixed once – costing 1360 small business over $70m – he probably doesn't need to do it again. This " business model" is becoming common place and about to be amendments to the Corps Act will make it worse. Without access to the huge sums of money owed to Subcontractors sitting in builders bank accounts – there is nothing really to PHOENIX. So secure it . Helps everyone

  • FIVE failures and only then do they start facing scrutiny! This is insane … do you have any idea how much damage these people cause. As entrepreneurs ourselves, we have born the brunt of illegal Phoenix activity a number of times and can assure you that the only winners in this process are the rogue operators and the liquidators who collect their fee for winding up the hollow entity. How does this approach propose to 1. change (rather than encourage) this type of behaviour, and 2. address the losses sustained by the creditors of these rogue operators.

    Here's the solution: ONE strike and you're out!. Your personal and all other assets are immediately seized and liquidated to honour your debts with your creditors, and you are given a bicycle to find your way to your next job. Guaranteed, this will end the practice, and ensure that those who call themselves "entrepreneurs" take heed of ALL opportunities, risks and responsibilities when entering into business.

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