Australia: Latent defects in phoenix legislation

What is phoenix activity?

Phoenix activity is not defined in Australian legislation¹. Perhaps this is not surprising given that the term is notoriously difficult, if not nearly impossible to precisely define². In fact, a study conducted by the International Association of Insolvency Regulators (IAIR) revealed that no jurisdiction within the association was able to categorically define phoenix activity, although they all acknowledged it was a problem.³

Notwithstanding this, definitions of phoenix activity have evolved from various parliamentary reports, papers and inquiries. Probably the most noteworthy, in the context of the building and construction industry, is the Royal Commission into the Building and Construction Industry⁴ (Cole Inquiry), which originally adopts the definition⁵ of the Australia Securities Commission (as it then was).

Phoenix activity has been described as the concept:

and

The recurring theme seems to be the stripping of assets from the failed company to the new company to avoid paying liabilities. A recent example of phoenix activity was considered in Australian Securities and Investment Commission v Somerville & Ors ⁸. In that case, the Supreme Court of New South Wales found a solicitor guilty of aiding and abetting directors to breach their duties by engaging in asset stripping or phoenix activity, by, inter alia, transferring assets from a failed company to a new company without consideration and all existing debts from the old company remained with it.

Who is affected?

Feedback from various stakeholders indicates that phoenix activity is a significant problem in the building and construction industry. It is considered a medium to high risk industry. ⁹

According to the Construction, Forestry, Mining and Energy Union and the Australia Taxation Office, phoenix activity is most prevalent in the industries which have large workforces of unskilled or semi unskilled labour and where labour costs are significant to the operation of the business.¹⁰ Interestingly, the type of industries which have been identified include formworking, scaffolding, concreting, bricklaying, plastering, gyprock fixing, steel-fixing and to a lesser extent plumbing. ¹¹

Typically, the activity usually involves non-payment of group tax (PAYG (withholding)), state payroll tax superannuation, long service leave contributions, and workers compensation premiums. ¹²

At what cost?

Phoenix activity is estimated to cost the federal government $600 million per year¹³ , adversely impact on businesses somewhere between $0.99 and $1.93 billion¹⁴ and affects employees in the order of $126 million¹⁵. Another report commissioned by the Fair Work Ombudsman, found that phoenix activity costs the Australian economy between $1.78 billion and $3.19 billion a year.¹⁶ However, these figures ought not to be held conclusive because quantifying the costs of phoenix activity is inherently problematic primarily because there is no precise definition.¹⁷ Needless to say, very few countries are able to provide definitive metrics on the incidence of phoenix activity¹⁸ but there is a general recognition that it poses a real financial problem. ¹⁹

What are the recent legislative attempts to crack down on phoenix activity?

On 20 December 2011, the Federal Government released two exposure drafts of legislation to crack down on phoenix activity being the Phoenixing Act which came into force on 1 July 2012²⁰ and the Similar Names Bill, which has not been passed yet and there is no indication when or if it will.

Phoenixing Act

The Phoenixing Act amends the Corporations Act to give the Australian & Securities Investment Commission (ASIC) a discretionary power to wind up an abandoned company in certain circumstances.²¹ Those circumstances are prescribed in s489EA of the Corporations Act 2001 (Cth). ²²

According to the Explanatory Memorandum²³ to the Phoenixing Act, one of the aims of the Act is to assist employees of companies abandoned by their directors, to receive payments from the General Employee Entitlements and Redundancy Scheme (GEERS)²⁴ more expeditiously.

ASIC has issued Regulatory Guide 242, which explains in broad terms when it will exercise its powers under Part 5.4C of the Corporations Act 2001 (Cth). Importantly, ASIC is not required to exercise its power in every situation.²⁵ In determining whether or not to exercise its power to wind up an abandoned company, ASIC will generally consider two things.

First, the primary consideration is to identify whether the company is abandoned. ²⁶ Second, if the primary consideration is met, then ASIC will consider:²⁷

1. whether there is a creditor capable of winding up the company;
2. whether sufficient time has passed for the creditor to take its own action;
3. the cost of liquidation compared to the amount of the employee entitlements claimed;
4. Whether or not there is a current business operation and the amount of money available in the Assetless Administration Fund (AA Fund).²⁸

ASIC must, however, publish notice of its intention to make the order on the ASIC database²⁹ . No order can be made by ASIC if there is an application before the Court to wind up the company. However, once ASIC makes the order to wind up the company, it may appoint a liquidator and the winding up proceeds as a creditors' voluntary winding up³⁰ .

If ASIC orders a company be wound up under s 489EA of the Corporations Act 2001 (Cth), it may appoint a liquidator for the purpose of winding up the affairs and distributing any property of the company. ³¹

Similar Names Bill

The Similar Names Bill provides that a director of a failed company can be jointly and individually liable for the debts of a new company that has a similar name to a pre-liquidation name of the failed company.³² There are also certain time restrictions specified. ³³ The common directors are liable for the debts of the new incorporated entity³⁴ , unless:

1. they are exempt by order of the court³⁵ ; or
2. by determination of the liquidator of the failed company³⁶ ; or
3. the new company was carrying on business under the same/similar name to the failed company during the 12 month period prior to the failed company being wound up³⁷ ; or
4. the failed company has paid its debts in full.³⁸

According to the Explanatory Memorandum³⁹ to the Similar Names Bill, the purpose of the Bill is to target phoenix activity where a director seeks appointment to a similarly named company to the failed company, so as to create the impression that the similarly named company is a continuation of the failed company.

Evaluate the effectiveness of the legislative attempts

When the Phoenix Bill and Similar Names Bill exposure drafts were released in 2011, the then Secretary to the Treasurer, the Honourable David Bradbury, made a number of claims about the effectiveness of the proposed legislation.⁴⁰ For the reasons articulated below, those claims are arguably ambitious and perhaps not justified.

Phoenix Act

The discretionary power given to ASIC to place a company into liquidation in certain circumstances is certainly beneficial for a few reasons.

First, it reduces costs and speeds up the liquidation (by removing the need to file an application). ⁴¹ Second, the liquidator can then investigate and if necessary, take appropriate action against directors more quickly for breaches of director's duties or claw back voidable transactions.⁴² Third, liquidation allows employee's access, in certain circumstances, to either GEERS or payment of employee entitlements under the Fair Entitlements Guarantee Act 2012 (Cth).

However, the legislation arguably does nothing to improve the outcomes for ASIC, employees or other unsecured creditors.⁴³

First, it does not define the difficult question, 'what is phoenix activity', although it does set out some circumstances which might easily be avoided by directors. While this paper recognises the difficulty with defining phoenix activity, the legislature ought to prescribe indicia to help identify it and bring some certainty about the issue. A good starting proposition might be the various definitions of phoenix activity. Otherwise, directors of failed companies might be discouraged from starting a new venture for fear of prosecution or uncertainty. Many failed entrepreneurs have succeeded after bankruptcy⁴⁴ and therefore the regime must not be too prohibitive so as to stifle growth in business. Some commentators have said that it is helpful to discern phoenixing activity from 'honest business failure' and perhaps this is another way to assist to formulate a definition. ⁴⁵

Second, the power bestowed on ASIC is discretionary. Therefore, even though an employee may be owed entitlements, ASIC can refuse to exercise its power⁴⁶. Given the factors prescribed in the Regulatory Guide 242 for ASIC to consider, it is reasonable to infer that the restraints are likely due to funding and resource issues.

Perhaps to extend the ambit of the legislation, ASIC might consider either introducing an annual levy on all companies or alternatively, increasing company annual review fees or fees paid on documents filed by the company. That money could be used to top up the Assetless Administration Fund (AA Fund)⁴⁷ to assist with investigations and prosecutions of directors who have been opportunistic at the detriment of creditors or employees.

Third, the Phoenix Act does nothing to actively discourage phoenix activity. The legislature ought to consider bestowing authority on ASIC to investigate companies they suspect are engaging in phoenix activity by performing audits on high risk industries in the building and construction industry. They might be given similar powers to the Australian Taxation Office (ATO) to investigate issues and issue penalties against directors and perhaps detect any early symptoms of phoenix activity. There should also be a national register of directors who have been the subject of adverse reports so that ASIC and the ATO can monitor their business interests.

Consequently, the Phoenix Act appears to be an improvement in form rather than substance⁴⁸ and certainly falls short of the claims made by the Honourable David Bradbury.

Similar Names Bill

The Similar Names Bill is not without its limitations. Some critics point out that that the proposed legislation does nothing to prevent phoenix activity and it merely addresses the symptoms. ⁴⁹

The Similar Names Bill is problematic for three reasons.

First, it does nothing to prevent the incorporation of a new company with a similar name to the failed company where the related party of a director of the failed company is appointed, such as a spouse, sibling or child. ⁵⁰

A good illustration of this problem is evident in the case study of Emerson Industries, referred to in the Cole Inquiry⁵¹. In that case, Mr Harkin, a bankrupt and director of a failed company called Emerson Services Pty Ltd, had his spouse incorporate and become a director of a company named ACN 088 440 304 Pty Ltd trading as 'Emerson Services', which essentially continued with the contracts of the failed company⁵². Under the proposed Similar Names Bill, Mr Harkin would escape personal liability.⁵³

This is a serious limitation of the proposed Similar Names Bill. Perhaps a more robust and realistic test is to make directors personally liable if they are carrying on the same or substantially the same business as the failed company and also have it extend to the directors extended family. For instance, the court might take into consideration, amongst other things, the relationship of the new director and director of the failed company, the structure of the failed and new company⁵⁴, the resources used, the customers, the nature and name of the business, the premises used, and the staff employed.

There should however, be a defence available to the directors of the new company if they can establish, on balance, that they paid fair market value for the assets of the failed company. Further, directors who act honestly and without the intention of seeking to avoid paying creditors can apply to the Court, or to the liquidator of the failed company to seek that they be exempt from liability.

A possible way to monitor affiliated directorships (in terms of relatives or partners of the directors) is for directors to nominate the names of their spouses and/or siblings on ASIC forms so that data matching information might be used by authorities to see if new directorships are started which are engaged in similar business to that of the failed company. Administratively, this could be achieved by a form filled in by the directors, and then each year at the company renewal, a statement should be distributed to directors about their associates and asked to confirm if they are still accurate. This proposed amendment might improve the effectiveness of the proposed legislation by preventing failed directors from using family associates to run a new business based on the failed business without paying their liabilities.

Second, the Similar Names Bill does not impose any liability on directors for the debts of the failed company, only the debts of the new company and only if that new company is not carrying on business⁵⁵. The effect of this appears counterintuitive because it does not satisfy the creditors of the failed company. It appears that the legislature have based the Similar Names Bill on legislation in the United Kingdom⁵⁶ and New Zealand⁵⁷.

The legislature ought to consider amending the provision to also capture the debts of the failed company, unless of course, the directors can demonstrate that they paid fair market value for the assets.

Third, the penalty is a civil penalty provision only⁵⁸ , which may not deter directors. The legislature should seek submissions about making the penalty criminal in circumstances where directors have a history of phoenix activity. This might be facilitated by a 'serial offender' national register which can be used by authorities to monitor directors. Although, a similar concept has been considered in other jurisdictions, such as Canada, it has not been widely supported for a variety of reasons, including stifling business⁵⁹. Conversely, other commentators believe there is utility in the incorporation of a disqualification scheme, commenting that the director disqualification scheme in the UK has had more success (in terms of reducing the occurrence of phoenix activity) in protecting creditors than jurisdictions without the measure.⁶⁰

Problems common to the Phoenix Act and Similar Names Bill

The Phoenix Act and the Similar Names Bill have no application when the company is placed into voluntary administration and revived by a Deed of Company Arrangement (DOCA)⁶¹. Although the DOCA is voted on by the creditors⁶² , a potential issue of injustice may arise where the majority of creditors are in fact the directors or related parties and vote in favour of the DOCA, perhaps to the detriment of other creditors. This situation is often seen in small family owned companies.⁶³

Although, upon an application, a creditor can apply to the court to set aside the decision of the second creditor's meeting on the DOCA⁶⁴ where the outcome has been determined by votes cast by related parties, it is seldom used by small unsecured creditors because of the expense and time involved. Consequently, unless major unsecured creditors like the ATO use the application, it is rarely used.

The legislature should consider reversing the onus of proof for an application under s 600A of the Corporations Act 2001, whereby there is a rebuttable presumption that the director has not acted fairly in voluntary administration where the majority of the votes cast were by related entities.

International Approach - 'reorganisation'

United States

The United States Bankruptcy Code permits the reorganisation of businesses in financial trouble as an option to resorting to liquidation⁶⁵. This is similar, to some extent, to the legislation in Australia in regards to voluntary administration. However, where they differ is, under Chapter 11 - Reorganisation of the US Bankruptcy Code, the existing management remains in control of the business as a debtor in possession, and is subject to the oversight of the court. The court is able to grant partial or full relief from many of the company's liabilities. Chapter 11 recognises the notion that the value of a business is greater if sold as a going concern rather than sold in constituent parts. The reorganised company can be retained, in which the creditors swap the debt for equity or, alternatively, the 'revamped' company can be sold as a going concern with the net proceeds of the sale distributed pro rata to the creditors. ⁶⁶

There is a contentious debate as to whether or not the process provides the correct balance between reorganising economically viable companies opposed to liquidating non-viable companies. ⁶⁷

The obvious and immediate issues are:

1. the cost of the reorganisation because of court intervention might be significant⁶⁸ compared to the potential return to creditors and therefore perhaps not in the public interest or the interest of creditors⁶⁹ ;
2. some critics point out that Chapter 11 fails on economic efficiency grounds by promoting incompetent management⁷⁰ ;
3. post studies of bankruptcy performance in the United States found that a significant number of businesses require a restructure again either through private intervention or through a second or third liquidation.⁷¹

These issues pose some challenging problems. The real question is, will the reorganisation model, on balance, improve the return to creditors and minimise phoenix activity within Australia?

There is utility in assisting creditors to take control and reorganise a failing company to protect their interests and preserve the overall value for creditors. The intended rationale behind the reorganisation model is that if you give the company back to the directors, then in theory, they are less inclined to syphon off the assets and therefore reduce the incidence of phoenix activity⁷². However, there is no evidence to suggest this is in fact the case, and therefore submissions ought to be sought from various stakeholders about the reorganisation model.

The legislature might consider a revised reorganisation model by holding directors of the failed companies personally liable if the company fails a second time, or alternatively, require the directors to offer some form of security before the court will sanction any reorganisation.

The biggest loser in phoenix activity is creditors. ⁷³ Therefore, giving creditors an opportunity to preserve their interest either by selling the failing business as a going concern or swapping debt for equity ought to be given serious consideration by the legislature.

Recommendations

Recommendation 1: Transactions to avoid employee entitlements - s 596AB of the Corporations Act

Notwithstanding the limited protection provided to employees in certain circumstances by GEERS and the Fair Entitlements Guarantee Act 2012 (Cth), which is triggered by the Phoenixing Act, it has been estimated, that the impact on employees is significant, in the vicinity of $126 million. ⁷⁴ Some surveys show that the number of employers who are non-compliant with their superannuation guarantee obligations is on the rise, which has increased almost 6 times between the 1990's and 2009. ⁷⁵

This is a concern because unlike creditors, employees generally cannot diversify their risk⁷⁶ and the statutory schemes only operate if prerequisites are met, and even then, ASIC can elect not to exercise its discretion.⁷⁷

Presently, s 596AB of the Corporations Act 2001 (Cth) provides, inter alia, that a person must not enter into a relevant agreement or a transaction with the intention of preventing the recovery of the entitlements of employees of a company or significantly reducing the amount of the entitlements of employees of a company that can be recovered.⁷⁸

Upon first blush, this appears to be a useful provision. However, the section has been criticised because of the 'subjective intention' requirement⁷⁹. In practice, the onus is on the applicant to prove the subjective intention of the director was to prevent or reduce the recovery of employee entitlements.⁸⁰ Perhaps this is why the section is rarely litigated and has received extensive criticism. ⁸¹

Therefore, the legislature should consider amending the provision to make it an objective test requirement. The obvious consequence of this is that directors might demand additional compensation from the company to mitigate their potential risk.⁸² However, on balance, it is arguably in the public interest to amend this section because employees are inherently more vulnerable because of a lack of financial information about the company, before and during their contract of employment and also lack the ability to obtain security like a creditor might for instance.⁸³ The amended section might have criminal and/or civil sanctions and any money recovered under civil sanctions might be used to compensate employees.

Recommendation 2: Education as a prerequisite to being a company director

There are institutes such as Australian Institute of Company Directors which provide courses to directors about, inter alia, corporate governance. ⁸⁴ Given the extent of phoenix activity and the indicators pointing to that fact that it is increasing⁸⁵ , the legislature might consider making courses like this mandatory for all new and perhaps existing company directors.

The benefit of this is readily apparent. Directors will arguably have a better understanding of the likely implications of their actions and therefore the legislature may be justified increasing penalty provisions against directors.

In contrast, this may discourage want to be or existing directors from taking the helm of a company in fear of prosecution and more harsh sanction provisions. The other obvious risk is that if a director is going to intentionally breach their fiduciary duties, then no amount of education will prevent this.

Recommendation 3: Conditions on directors of failed companies in future business ventures

As this paper has discussed, the Phoenix Act and Similar Names Bill are limited in their scope.⁸⁶ Perhaps a more robust approach is to require the director of a failed company to put up capital in any new company if the liquidator of the previous failed company has lodged an adverse report or alternatively, the onus is placed on the directors to show why they should not be required to do so. ⁸⁷

In the United States, the doctrine of capitalisation has been used to lift the corporate veil where a company sets up a subsidiary with insufficient capital to meet debts that could have reasonably be expected to arise. ⁸⁸ Some suggest the doctrine of capitalisation should be implemented in Australia. ⁸⁹

This could be implemented by amending the Corporations Act 2001 (Cth) to make the parent company in a group make restitution to the subsidiary company and creditors upon insolvency, in circumstances where it was not reasonable that the subsidiary could meet expected liabilities.

The recommendation might be used to curb phoenix activity by providing a means for creditors to access assets within the group company that would otherwise be unavailable and to target conduct where group companies were incorporated merely to avoid liabilities.

There might be some limitations. For example, it might stifle start-up businesses by increasing compliance costs in order to do due diligence on the capitalisation of subsidiary companies. Further, it might be difficult to prove that the subsidiary could not reasonably meet liabilities for a variety of reasons such as the economy or management decisions.

Recommendation 4: Arm's length transactions

Further consideration ought to be given to enforcing a prohibition on the transfer of tangible assets from the failed company to the original directors. Whilst this proposition has been criticised for stifling business and restricting the opportunity of achieving the highest price⁹⁰ , there seems to be some merit to the proposition. For instance, all transfers from the company to its directors or related associates could be prohibited except with leave of the Court or approval from ASIC. This could be implemented by making an application to the Court and putting on evidence about the transaction and demonstrating the transfer is for fair market value. If the Court agrees, by way of expert evidence, then leave may be granted to the directors to proceed with the transaction.

Recommendation 5: Disqualification

Part 2D.6 of the Corporations Act provides a number of circumstances when a person can be disqualified from managing a corporation. However, ASIC only has power to disqualify a person from managing corporations if a person has been an officer of two or more corporations which have been wound up⁹¹ within the last seven years and been the subject of adverse liquidator's reports. ⁹²

The legislature ought to consider amending s296F. The section may be amended to one corporation which has been wound up and the person been a subject of an adverse liquidator's report.⁹³ This may combat fraudulent activity by allowing regulators to stop phoenix operators after one liquidation and avoid the costs of further court intervention. The onus would be on the disqualified director to prove why they should be able to manage a company, should they contest the order.

Recommendation 6: Government Information Sharing

Presently, there does not appear, at the federal level, to be clear responsibilities on agencies for detecting and policing phoenix activity in the building and construction industry. ⁹⁴

The government ought to consider sharing information between government agencies, particularly ASIC and the ATO. This could be implemented by the government establishing guidelines on the responsibilities of major agencies. Appropriate funding should also be allocated to the agencies, through levies on companies or by raising the company tax rate to allow them to properly carry out their responsibilities.

For instance, if an employee makes a complaint to ASIC about not receiving their entitlements, ASIC might make its own enquiries, and then refer the matter to the ATO to see if there has been a history of late or no payments of tax liabilities. If after an investigation, there is evidence of phoenix activity, then ASIC should take action at an early stage.

Conclusion

Phoenix activity in the building and construction industry has been identified as a medium to high risk industry. Phoenix activity in this industry has often been associated with the failure to pay tax, avoid paying employee entitlements and breaching director's duties. Armed with this information, the federal government ought to focus their resources in developing solutions to these problems instead of introducing legislation which might catch offenders in limited circumstances.

This paper recognises that there is no quick fix to phoenix activity. It is complex and requires careful consideration. It is of profound importance that any solution should not undermine the entrepreneurial spirit and commitment to the principles of company law and notion of limited liability which has stimulated economic growth underpinned the economy for many years. A holistic approach is necessary which, amongst other things, clearly identifies the issues in the building and construction industry (the Cole Inquiry is a good start), coordinates compliance between various agencies such as the ATO and ASIC, reduces red tape and sends a clear and stern message to directors engaging in phoenix activity that it will not be tolerated and there will be civil and criminal sanctions.

Needless to say, current efforts by the government to curtail phoenix activity fall short of what the community might ordinarily expect. A good first step might be defining phoenix activity. This could be achieved by setting out indicia in the Corporations Act.

The current legislative reforms either proposed or implemented by the government have been latent defects.

Footnotes

¹Corporations Act 2001 (Cth).
²The Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Corporate Insolvency Laws: A Stock take (2004), 131.
³Appleby, P. The regulation of phoenix companies: Collective Responses of a Survey of Members of the International Association of Insolvency Regulators, 29 October 2004.
⁴Commonwealth, Royal Commission into the Building and Construction Industry, Final Report (2003) ('Cole Inquiry').
⁵ ASC Research Paper, Phoenix Companies and Insolvent Trading, No. 95/01 (July 1996) p1; "phoenix activity" is defined as a company that fails and is unable to pay its debts; and acts in a manner which intentionally denies unsecured creditors equal access to the available assets in order to meet and pay debts; and within 12 months of closing another business commences which may use some or all of the assets of the former business, and is controlled by parties related to either the management or directors of the previous company.
⁶Insolvency Reform package released by the Treasury dated 12 October 2005.
⁷Treasury (2009), Action against fraudulent Phoenix Activity: Proposals Paper, page 5.
⁸[2009] NSWSC 934.
⁹PWC, Phoenix activity Sizing the problem and matching solutions, (2012).
¹⁰Cole Inquiry.
¹¹Cole Inquiry, 115, para 6.
¹²Cole Inquiry, 115, para 7.
¹³Treasury 2009 (November 2009), Action against fraudulent Phoenix Activity: Proposals Paper, page 5.
¹⁴PWC, Phoenix activity Sizing the problem and matching solutions, (2012), 25; Barlow, Darren 1996, Phoenix Activities and Insolvent Trading, 149.
¹⁵PWC, Phoenix activity Sizing the problem and matching solutions, (2012), 22.
¹⁶PWC, Phoenix activity Sizing the problem and matching solutions, (2012), 22.
¹⁷Murrary Roach, 'Combating the Phoenix Phenomenon: An Analysis of International Approaches' (2010), eJournal of Tax Research (2010), Vol 8, no 2, 98.
¹⁸Murrary Roach, 'Combating the Phoenix Phenomenon: An Analysis of International Approaches' (2010), eJournal of Tax Research (2010), Vol 8, no 2, 98.
¹⁹Appleby, P. The regulation of phoenix companies: Collective Responses of a Survey of Members of the International Association of Insolvency Regulators, 29 October 2004.
²⁰Corporations Amendment (Phoenixing and Other Measures) Act 2012.
²¹Regulatory Guide 242: ASIC's power to wind up abandoned companies, January 2013, p4, Reg 242.1.
²²Briefly, those circumstances are the company has not responded to a return of particulars, or lodged any other documents with ASIC under the Corporations Act in the last 18 months, which leads ASIC to believe that the company is not carrying on business and that making the order is in the public interest; the company's review fee has not been paid in full at least 12 months after the due date for payment; ASIC has reinstated the registration of the company in the last 6 months of when it became due and believe that making the order is in the public interest; ASIC believe that the company is not carrying on business and have given the company an opportunity to object to the wind-up, which no objection was received.
²³Explanatory Memorandum, Corporations Amendment (Phoenixing and other Measures) Bill 2012 (Cth).
²⁴GEERS is a scheme funded by the Australia Government to assist employees who have lost their jobs due to the liquidation of their employer and who are owed employee entitlements. GEERS was replaced by the Fair Entitlements Guarantee Act 2012 which commenced on 5 December 2012.
²⁵Regulatory Guide 242: ASIC's power to wind up abandoned companies, January 2013, p4, Reg 242.2.
²⁶Regulatory Guide 242: ASIC's power to wind up abandoned companies, January 2013, p6, Reg 242.11.
²⁷Regulatory Guide 242: ASIC's power to wind up abandoned companies, January 2013, p6, Reg 242.12.
²⁸The AA Fund was established by the Federal Government and is administered by ASIC. It finances preliminary investigations and reports by liquidators into the failure of companies with few or no assets, where it appears that enforcement action may result from the investigation and report. A particular focus of the AA Fund is to curb fraudulent phoenix activity.
²⁹Corporations Act 2001 (Cth), s489EA(6).
³⁰Corporations Act 2001 (Cth), s489EB.
³¹Corporations Act 2001 (Cth), s489EC.
³²Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s596AJ.
³³The director must have been a director of the failed company within the twelve month period preceding the failed company's winding up as well as be a director of the phoenix company when the phoenix company's debt was incurred, which must occur within five years from the commencement of the failed company's winding up. See Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s596AJ(1)(b) and (d);
³⁴Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s596AJ(2).
³⁵For instance, where the person has acted honestly and having regard to all the circumstances of the case; see Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s 596AK.
³⁶The liquidator can have regard to the assets of the failed company and the assets of the new company in making a determination; see Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s596AL(1).
³⁷ Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s596AM.
³⁸ Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s596AN
³⁹ Explanatory Memorandum, Corporations Amendment (Similar Names) Bill 2012 (Cth).
⁴⁰Hon David Bradbury said that the amendments will stop directors from exploiting the limited liability protections in the corporations law to avoid having to pay any debts including workers entitlements, that they incur in a phoenix company and will stop directors form racking up debts through phoenix companies. He also said that the proposed amendments would crack down on phoenixing where directors try to avoid paying workers entitlements by restarting using their failed business by using a similar company name; see David Bradbury, 'Gillard Government Releases Draft Laws to Crack Down on 'Phoenixing' (Media Release, No 66, 20 December 2011).
⁴¹Helen, Anderson, 'The Proposed Deterrence of Phoenix Activity: An Opportunity Lost?' (2012), 34, Sydney Law Review, 411, 426.
⁴²See for example Corporations Act 2001 (Cth) s 588FB (uncommercial transactions) and s 588FDA (unreasonable director related transactions).
⁴³Helen, Anderson, 'The Proposed Deterrence of Phoenix Activity: An Opportunity Lost?' (2012), 34, Sydney Law Review, 411, 426.
⁴⁴Henry Ford (who perfected the production line); Walt Disney (entertainment); Charles Goodyear (investor of the rubber tyre).
⁴⁵Murrary Roach, 'Combating the Phoenix Phenomenon: An Analysis of International Approaches' (2010), eJournal of Tax Research (2010), Vol 8, no 2, 92.
⁴⁶Regulatory Guide 242: ASIC's power to wind up abandoned companies, January 2013, p6, Reg 242.12.
⁴⁷In October 2005, ASIC was allocated $23 million over four years by the Federal Government to establish the AA Fund. It finances preliminary investigations and reports by liquidators into the failure of companies with few or no assets, where it appears to us that enforcement action may result from the investigation and report. A particular focus of the AA Fund is to curb fraudulent phoenix activity; See Australian Securities and Investments Commission, "Assestless Administration Fund" ASIC (online), 24 October 2013 (http://www.asic.gov.au/aafund#more).
⁴⁸Helen, Anderson, 'The Proposed Deterrence of Phoenix Activity: An Opportunity Lost?' (2012), 34, Sydney Law Review, 411, 426.
⁴⁹Office of Minister of Commerce (2003), paragraphs 48-52.
⁵⁰Helen, Anderson, 'The Proposed Deterrence of Phoenix Activity: An Opportunity Lost?' (2012), 34, Sydney Law Review, 411, 427.
⁵¹Cole Inquiry, 121.
⁵²Mark McKillop, 'Proposed Law on Phoenix Activity Falls Flat (online), 5 March 2012, (http://markmckillopbarrister.com/2012/03/05/proposed-law-on-phoenix-activity-falls-flat/).
⁵³Similar provisions to Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s 596AK(3) may be implemented.
⁵⁴Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s 596AJ(1).
⁵⁵Corporations Amendment (Similar Names) Bill 2012, Schedule 1, item 1, inserting Corporations Act s 596AM(1)(b).
⁵⁶Companies Act 2006 (UK).
⁵⁷Companies Act 1993 (NZ).
⁵⁸Similar Names Bill Schedule 1, item 1, inserting Corporations Act, s 596AJ(1).
⁵⁹Bomhof, S, 'Canada: Duties of Directors in the Insolvency Zone', Mondaq Business Briefing, 21 October 2009, p30.
⁶⁰Girgis, J. 'Corporate Directors' Disqualification: The New Canadian Regime?' Alberta Law Review, Vol. 46, No 3, 2 July 2009.
⁶¹Helen, Anderson, 'The Proposed Deterrence of Phoenix Activity: An Opportunity Lost?' (2012), 34, Sydney Law Review, 411, 428.
⁶²Corporations Act 2001 (Cth), s 439C(a).
⁶³Ben Butler, 'Fury as Nursery to Repay Only 6cents in Dollar' Sydney Morning Herald (online), 11 January 2012 (http://www.smh.com.au/small-business/managing/fury-as-nursery-to-repay-only-6162-in-dollar-20120111-1pu6d.html).
⁶⁴Corporations Act 2001 (Cth), s 600A; See also Deputy Commissioner of Taxation v Woodings (1994) 13 WAR 189 for an example of this section being successfully used.
⁶⁵Appleby, P. The regulation of phoenix companies: Collective Responses of a Survey of Members of the International Association of Insolvency Regulators, 29 October 2004. October 2004.
⁶⁶Haidar, S. "The Chrysler Bankruptcy: Raising the Cost of Capital for U.S. Issuers?: Seeking Alpha website, 4 May 2009.
⁶⁷Crouch, N and Amirbeaggi, S, 'Pre-packs: a legitimate means to phoenix an insolvent company', Recovery (online) 2011 < http://www.bankruptcy.net.au/prepacks.html>.
⁶⁸Crouch, N and Amirbeaggi, S, 'Pre-packs: a legitimate means to phoenix an insolvent company', Recovery (online) 2011 < http://www.bankruptcy.net.au/prepacks.html>.
⁶⁹Altman, Edward, Journal of Applied Corporate Finance, 2009, Vol 21, no 3, p 51.
⁷⁰Murrary Roach, 'Combating the Phoenix Phenomenon: An Analysis of International Approaches' (2010), eJournal of Tax Research (2010), Vol 8, no 2, 113.
⁷¹Altman, Edward I, and Edith Hotchkiss (2006), Corporate Financial Distress & Bankruptcy, 3rd edition. John Wiley, Hoboken. NJ.
⁷²Murrary Roach, 'Combating the Phoenix Phenomenon: An Analysis of International Approaches' (2010), eJournal of Tax Research (2010), Vol 8, no 2, 113.
⁷³PWC, Phoenix activity Sizing the problem and matching solutions, (2012), 25; Barlow, Darren 1996, Phoenix Activities and Insolvent Trading, 149.
⁷⁴PWC, Phoenix activity Sizing the problem and matching solutions, (2012), 22.
⁷⁵Australian Council of Trade Unions, Industry Super Network, Industry Funds Credit Control Australian, Institute of Superannuation Trustees, Combined submission to the Review into the Tax Office's administration of the Superannuation Guarantee Charge, July 2009, p 2.
⁷⁶Paul Halpern, Michael Treilcock and Stuary Turnbull, 'An Economic Analysis of Limited Liability in Corporation Law' (1980) 30 University of Toronto Law Journal 117 at 149.
⁷⁷Regulatory Guide 242: ASIC's power to wind up abandoned companies, January 2013, p4, Reg 242.2.
⁷⁸Corporations Act 2001 (Cth), ss 596AB(1)(a) and 1(b).
⁷⁹Anderson, Helen, 'The Proposed Deterrence of Phoenix Activity: An Opportunity Lost?' (2012), 34, Sydney Law Review, 411, 432; See also Anderson, Helen, "Creditors' Rights of Recovery" (2006) 30(1) Melbourne University Law Review 1.
⁸⁰Commonwealth, Parliamentary Debates, House of Representatives, 9 March 2---, 14301-2, (Kelvin Thompson).
⁸¹Helen, Anderson, "The Proposed Deterrence of Phoenix Activity: An Opportunity Lost?" (2012), 34, Sydney Law Review, 411, 432; See also Australian Journal of Labour Law, Phoenix Activity and the Recovery of Unpaid Employee Entitlements - Ten years on, (Helen Anderson, 2008)
⁸²Paul Halpern, Michael Treilcock and Stuary Turnbull, 'An Economic Analysis of Limited Liability in Corporation Law' (1980) 30 University of Toronto Law Journal 117 at 149.
⁸³Helen, Anderson, 'The Proposed Deterrence of Phoenix Activity: An Opportunity Lost?' (2012), 34, Sydney Law Review, 411, 432; See also Australian Journal of Labour Law, Phoenix Activity and the Recovery of Unpaid Employee Entitlements - Ten years on, (Helen Anderson, 2008), 141
⁸⁴Australia Institute of Company Directors, 'What will you Learn (online), 2011, (http://www.companydirectors.com.au/Courses/Courses-for-the-Director/Company-Directors-Course/What-will-you-learn);
⁸⁵PWC, Phoenix activity Sizing the problem and matching solutions, (2012), 25; Barlow, Darren 1996, Phoenix Activities and Insolvent Trading, 149.
⁸⁶For instance, ASIC will not exercise their power in all circumstances and the Similar Names Bill is avoided by selecting a different name to the failed company.
⁸⁷Companies Act 1990 (Ireland), s 149.
⁸⁸Treasury (2009), Action against fraudulent Phoenix Activity: Proposals Paper, 20.
⁸⁹New South Wales, James Hardie Special Commission of Inquiry Report, Final Report (2004).
⁹⁰Murrary Roach, 'Combating the Phoenix Phenomenon: An Analysis of International Approaches' (2010), eJournal of Tax Research (2010), Vol 8, no 2, 113.
⁹¹Corporations Act 2001 (Cth), s 206F.
⁹²Corporations Act 2001 (Cth), s 533(1).
⁹³Cole Inquiry, 166.
⁹⁴Cole Inquiry, 164.

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