Australia Company Law: Illegal Phoenix Activity Essay

Question:

Discuss about the Australia Company Law for Illegal Phoenix Activity.

Answer:

Introduction

Illegal phoenix activity is a situation whereby the company directors intentionally try to evade paying the company creditors. It involves the planned relocation of assets from obligated business to a new business to evade paying creditors, tax or workers rights. Directors abandon the old company for the new one leaving the old company in debts without assets to pay creditors.[1] On the other hand, the new company is then operated by the same directors and in the same business as in the previous company. They continue with the same business under a new structure. Through this illegal business, the directors evade paying debts they owed people at the former company. Altogether, illegal phoenix activity is a grave offense and might result in company directors being jailed. Therefore, this paper examines the extent to which the current laws concerning illegal Phoenix should get changed.

Transactions to Deprive Employees of their Entitlements

The crimes committed by the directors who are involved in illegal phoenix activity are severe and calls for serious legislations to curb. Some of the directors enter into dealings with the aim of stopping the recovery of the employee’s prerogatives of a company that can get recovered.[2] They also get involved in reducing the amount of the benefit of the employees. On the other hand, the appointment of liquidator permits action to be taken under Act Sec 596AB against such directors.[3] However, the provision has never been adequately applied. As enacted in 2000, section 596AB of the Corporations Law Amendment Act 2000 (Cth) was realized to be difficult to implement, also the recommendations for it to be reviewed also failed to be enacted.[4] In 2008 the Joint Committee of Public Accounts and Audit noted the increment of the number of people promoting the benefits of the fraudulent phoenix activity. However, at its hearings, Australia Taxation Office (ATO) realized that the fight against phoenix activity was being frustrated by light penalties and lack of prosecutions.[5] Therefore, it is better to change section 596AB of the Corporations Law Amendment Act 2000 (Cth) to safeguard employees against directors who fails to provide workers entitlements.

Similar Names Bill

Additionally, the law of the illegal phoenix activities should be changed so that to solve the issue of the Similar Names Bill. This bill could be useful if it can deter its targeted behavior; however, its limitations are clearly apparent.[6] It does not prevent phoenix behavior in situations where a different name has been used for a new company. Certainly, in cases where the company has become notorious because of not paying its debts, the previous employers may be forced to look for its beneficiary under a changed name for it to achieve the supply of goods and services.[7] Besides, the Similar Names Bill does not thwart the amalgamation of a new unit with the same name to botched business where a relative of the director of the botched corporation is instead selected as director. Other than that, the Bill also fails to inflict obligation on directors for the liabilities of the company that failed, but only for the debts they owe the new business, and only if the new company is not doing business. Corporative Acts s 182(1) only imposes public liability, but not criminal responsibility.

Problems of Enforcement

Furthermore, the laws governing illegal phoenix activities need to be changed because of the issues concerning its implementation. The government need ask whether the current directors’ responsibilities are sufficient or not. It has been assumed that since phoenix activity is going on, these laws may fail to tackle it, and therefore, there is a need for enacting new legislations.[8] But in reality, the prosecution may not take place if the ASIC lacks resources to take action on the issue. On the other hand, the passage of the further laws will not make any difference to the occurrence of phoenix activity if the ASIC will not have the capacity to investigate violations.[9] The productivity Commission observes that it is a significant issue that considerately undermines the sureness of the creditors in the framework of solvency, and therefore hinders the effectual closure of the business. The Senate Economics Reference Committee also says that there is a significant issue both in the construction industry and economy and that there is a significant culture of disregarding the law.[10] Therefore, it would be vital that ASIC is given the authority to investigate illegal phoenix activities and prosecute.

Personal Reflection

Lastly, I believe that since the illegal phoenix activity laws have got numerous loopholes, it needs to be changed for the safety of the employees and creditors. Moreover, I believe that government is not doing the best to ensure that phoenix activities do not evade paying taxes, which in term lowers the economy of the nation. Furthermore, the Similar Names Bill should get changed completely to curb phoenix behavior. In other words, the Bill should get scrapped entirely to avoid the use of the same name. Doing so may prevent the fraudulent director from using their relatives on their behalf. Besides, ASIC should have the capacity to prosecute the culprits of the illegal phoenix behavior. Finally, I think that the current Corporative Act is inadequate to handle issues concerning phoenix activity; therefore, I recommend that the government should consider reintroducing the provision as a public criminal Act.

Conclusion

To conclude with, the state should accept its duties of tackling illegal phoenix activity, which hurts its revenue and economy, the well-being of the employees, and creditors of various companies. Other than that, the Phoenixing Act and the Similar Names Bill are not likely to cause any harm; it is because they cannot significantly tackle the problem. There is need to look into the reasons why these laws are inadequate or if there any legal issue required before these laws are amended. Lastly, if the government will not act immediately, many people will suffer because of the failed law of the illegal phoenix activity.

References

Anderson, H. (2014). Directors' Liability for Fraudulent Phoenix Activity--a Comparison of the Australian and UK Approaches. Journal Of Corporate Law Studies, 14(1), 139-173.

Anderson, h. (2015). Fraudulent Transactions Affecting Employees: Some New Perspectives on the Liability of Advisers. Melbourne University Law Review, 39(1), 1-46.

Anderson, H., O'Connell, A., Ramsay, I., Welsh, M., & Withers, H. (2014). Defining and Profiling Phoenix Activity. SSRN Electronic Journal.

Anderson, H. (2014). Pressing the right buttons: Australian case studies in the protection of employee entitlements against corporate insolvency. International Labour Review, 153(1), 117-142.

Cowan, S. (2013). Phoenix Companies and Directors' Personal Liability. Credit Control, 34(6/7), 8-12.

Giardina, A., & Pinto, D. (2014). A Proposal to Address the Impact of Fraudulent Phoenix Activities on Unremitted Superannuation Guarantee Contributions in Australia. Journal Of Australian Taxation, 16(1), 74-107.

Munro, C. (2009). Govt moves on phoenix activity. Money Management, 23(44), 10.

Rotem, Y. (2013). Small Business Financial Distress and the 'Phoenix Syndrome'-A Re-evaluation. International Insolvency Review, 22(1), 1-28.

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