Transferring money or assets between companies to avoid paying creditors could be specifically prohibited under the Corporations Act as part of wide ranging reforms which have been put on the table to combat illegal phoenixing activity.

Released by Revenue and Financial Services Minister Kelly O’Dwyer, the Combatting Illegal Phoenixing Discussion Paper highlights eleven areas of proposed reform to prevent phoenixing – the practice of transferring assets from one company to another in order to avoid the liabilities and obligations of the first company.

A key part of the proposed reforms revolves around the creation of a specific offence which would apply where directors transfer assets from one company to another where the purpose of the transfer is to avoid paying amounts owing to creditors.

According to the paper, the offence would apply if ‘the main purpose of the transfer was to hinder or delay the process of that property becoming available for division among the first company’s creditors’.

Remedies where the offence occurred could include civil and criminal penalties; an ability for liquidators and ASIC to clawback assets or compensation from the transferee company; and liquidators, ASIC and creditors being able to pursue directors and other people who were involved in the transfer for compensation.

At the moment, there is no specific offence for illegal phoenix activity, but conduct which constitutes illegal phoenix behaviour is generally a civil and or criminal breach of a director’s statutory duties.

Other potential reforms include:

  • Limiting the ability of director appointments and resignations to be backdated
  • Introducing a phoenixing hotline to allow the public to communicate concerns about suspected cases of illegal phoenixing to ASIC or the ATO
  • Restricting the right of ‘related creditors’ to vote at meetings and thereby frustrate efforts of non-related entities to pass resolutions
  • Extending existing promoter penalty laws to apply to those who promote or facilitate phoenix activity
  • Extending the Director Penalty Notice Scheme to make directors of companies to recover unpaid amounts of GST
  • Changing the ways in which the government identifies and targets the most egregious phoenix operators who have adopted phoenixing as a business model
  • Appointing liquidators on a ‘cab off the rank’ system to avoid the appointment of liquidators who are friendly to the interests of directors of the insolvent company

The paper’s release follows previous government announcements of an intention to introduce director registration numbers for all company directors in order to better enable the tracking of any insolvent companies with whom the individual has been involved.

A report in 2012 by PwC put the cost of illegal phoenix activity to the national economy at $3.2 billion per year.

Those impacted include employees of the original failed company, other businesses and contractors who are owed money because they have supplied goods and services and statutory bodies like the Australian Taxation Office (ATO).

O’Dwyer said the reforms were about cracking down on rouge operators.

“The Government is committed to helping the honest and diligent entrepreneurs who drive Australia’s productivity, but we won’t tolerate those who misuse the corporate framework for their own advantage,” she said.