On 18 February 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Act) came in to force.1

The Act will equip ASIC and liquidators with increased power to combat phoenix activity, whilst giving regulators more power to prosecute people who conduct or facilitate the illegal practice of phoenixing.

What is Phoenixing?

Phoenixing is an illegal practice that involves company directors transferring assets of an existing company to a new company, leaving the old company with the existing debt. The old company is then placed into liquidation, but as the company no longer has any assets there is nothing to be used to cover these debts. The ATO has noted that there are a number of indicia that suggest illegal phoenix activity, including:

  • the directors of the new entity are family members or close associates of the director(s) of the former company;
  • a similar trading name is used by the new entity; and
  • the same business premises and telephone number (particularly mobile number) are used by the new entity.2

It is a practice that is particularly rife within the construction industry.

Phoenixing has a prolific and detrimental impact on the Australian economy. A 2018 report estimated that illegal phoenixing costs the Australian economy between $2.85 and $5.13 billion annually. It estimated the following annual costs of phoenix activity:

  • The cost to business from unpaid trade creditors is between $1.162 billion to $3.171 billion.
  • The cost to employees, lost through unpaid entitlements is between $31 million to $298 million.
  • The cost to government from unpaid taxes and compliance costs is more than $1.66 billion.3

How does phoenixing affect the construction industry?

Illegal phoenixing can occur in any industry or location, however, it is particularly prevalent in the building and construction industry. When a company is put into liquidation without any assets all the people owed money that were attached to that company are unable to be paid. Company directors may revert to these practices to avoid paying debts and liability for issues like building defects. Some developers and builders create companies to carry out large projects, take the profits and then shut them down before paying taxes and debts or fixing defects that may have occurred in the job.

Stakeholders that are affected by the non-payment from these companies that transfer all their assets include:

  • Employees;
  • Sub-contractors;
  • Creditors;
  • ATO

A report conducted by the Senate Economics References Committee, in December 2015, stated that while the construction industry only makes up 8-10% of total employment, it accounts for 20-25% of all insolvencies in Australia.4 While all insolvencies will not be directors moving assets and winding up companies, administrators found evidence of wrongdoing in 561 construction businesses that failed in NSW in 2017-18.5

The Act

The Act is an amendment to the Corporations Act 2001 (Cth) (Corporations Act), however, it also imposes limited amendments to the A New Tax System (Goods and Services Tax) Act 1999 (Cth) and the Taxation Administration Act 1953 (Cth). Collectively, the main features of the amendments include the following:

  • New criminal offences and civil penalty provisions for company officers that fail to prevent the company from making creditor-defeating dispositions. A creditor defeating disposition consists of a director of a company selling its assets to a new company for less than the market value or the best price that may have been obtainable for the assets. This disposition prevents creditors from being able to get a hold of the assets to pay off debts when a company is wound up.6
  • The new legislation provides ASIC with greater power to order the return of property or an equal monetary value from the person that received the property as part of illegal phoenix activity.
  • Resignations by Directors of companies will only be able to be backdated to a maximum of 28 days and Directors will now be personally liable for any GST the company may owe to the ATO.

Take away

The Act is a positive step forward for Australia’s commercial landscape, and, especially positive for Australia’s construction and infrastructure industry. The construction industry, from residential to commercial stakeholders, is bound to benefit, whether directly or indirectly, from the heightened regulation of illegal phoenixing. It will also put further pressure and emphasis on directors to ensure they comply with their obligations under the relevant legislation.

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[1] The amendments to the Corporations Act 2001 (Cth) commenced on 18 February 2020, whilst the amendments to A New Tax System (Goods and Services Tax) Act 1999 (Cth) and Taxation Administration Act 1953 (Cth) will commence on 1 April 2020
[2] Senate Economics References Committee, Parliament of Australia, Insolvency in the Australian Construction Industry (December 2015) 64
[3] PwC, The Economic Impacts of Potential Illegal Phoenixing Activity (Report, July 2018) iii. Accessed online: https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Illegal-phoenix-activity/The-economic-impact-of-potential-illegal-phoenix-activity/
[4] Jirsch Sutherland, Phoenix Issues Rise From Construction Industry Insolvency Report (13 July 2017) URL: https://www.jirschsutherland.com.au/latest-news/phoenix-issues-rise-construction-industry-insolvency-report/
[5] Nigel Gladstone and Carrie Fellner, ‘Small business flattened by “dodgy” builders in phoenixing epidemic’ The Sydney Morning Herald (online, 17 December 2019)  URL: https://www.smh.com.au/national/nsw/small-business-flattened-by-dodgy-builders-in-phoenixing-epidemic-20191125-p53drr.html
[6] Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth), schedule 1 part 1

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.