The corporate watchdog has once again announced a crackdown on phoenix activity, announcing it will target company directors with a history of failed companies as part of a new surveillance program.
But the crackdown – which will focus on the construction, transport and security industries – comes as the debate as to what the term ‘phoenix company’ actually means.
“What is always lacking in my view from these discussions is a proper definition of what phoenix companies are,” says Dissolve liquidator Cliff Sanderson.
“There is certainly no description in either tax legislation or corporations law about what phoenix companies are.”
The Australian Securities and Investments Commission said in a statement the surveillance program will include businesses in the building and construction, labour hire, transport, security and cleaning industries.
ASIC commissioner Greg Tanzer said in a statement the surveillance will mostly focus on small businesses, operating from July 2011 onwards.
“To date, we’ve identified a target group of 1400 companies. We’re now paying special attention to approximately 2500 individuals who were directors at the time these companies failed or ceased being directors shortly before the companies were wound up,” he said.
“In some cases, company failures are nothing more than bad luck. But there are some people who deliberately walk away without any intention of meeting liabilities and establish a new company to conduct the same business.”
While Sanderson says genuine phoenix activity should be stopped, there is often a misunderstanding about what constitutes phoenix operations.
“The classic example is that someone who is a contractor pays himself a wage, but then loses a job and therefore doesn’t have the money to pay his tax payments and so on.
“So he puts it into liquidation. Then, six months later, he gets a new contract – is that a phoenix company? I suspect in the ATO and ASIC’s view, they’d say yes, but no assets are transferred.”
And that’s the key – phoenix operations are defined by ASIC as when the assets of an indebted company have been transferred in order to avoid paying creditors, tax or employee entitlements. The new companies usually have the same director.
ASIC cited a report which places a $3 billion value on income lost through phoenix activity.
“Illegal phoenix activity has far reaching and unfair consequences,” it said.
New director liability laws have already been introduced to crackdown on this sort of behaviour. But Sanderson says there is still a need to have a much broader conversation about the very definition of phoenix activity.
“There is a lack of rigor in this discussion, in that regard,” he says.