Whilst it is difficult to accurately determine the true cost of “phoenix activity” primarily due to a lack of relevant data, it has been estimated to cost the Australian economy in the vicinity of $3.2 billion per annum. (1)
What is phoenix activity? It essentially involves one company taking over the business of another company that is liquidated where the controllers of both companies are the same people or their associates. It is important to profile and understand phoenix activity to really understand how it needs to be deterred. In my opinion it is the illegal or “harmful phoenix activity” which has the most profound impact on the economy. Indeed in the recent case of Plutus Payroll which appears to have involved harmful phoenix activity, it is estimated that the loss to Government Departments (mainly the ATO) could be as high as $165 million.
Harmful phoenix activity left unchecked is not only anti-competitive, but also undermines Australia’s revenue base.
What is required to deter harmful phoenix activity? Whilst the list below is not exhaustive, it seeks to cover certain keys areas:
1. There needs to be an enhanced information system to detect and measure phoenix activity. To this end, there needs to be an overhaul of the current collection/reporting system by Registered Liquidators to ASIC. Better data capture will enable improved statistics/measurement of the true extent of the issue and also enable certain industries/individuals to be focussed on.
2. There also needs to be more effective sharing of information between State and Federal Regulators, as well as enhancing information sharing with allies such as credit reporting agencies and trade bodies.
3. Establish via ASIC a free online search acility that has a register of disqualified directors and associated companies.
4. Perhaps most importantly, the process to incorporate a company and become a director needs to be tightened.
• Presently it is easier to become a director of a company than it is to open a bank account. This has to change.
• Also, the registration of an Australian company only requires the name, address, and date of birth of each proposed officer. ASIC forms do not presently require or ask for prior corporate history of proposed directors and no supporting evidence is required about their identity.
Recent indications from Federal Government are that it may not be too long before a Director Identification Number (“DIN”) is introduced. This should be introduced without delay and require all directors to undergo a 100 point ID check to get a DIN. It should also be an online application. Whilst the DIN is not the complete panacea to counter “harmful phoenix activity”, it is a long overdue step in the right direction when done with points 1-3 above.
Importantly such changes will not mean that directors of a company should fear seeking professional advice as early as possible when they are in financial difficulty. Rather, the above is really focusing on the serious financial impact that “harmful phoenix activity” has on an economy.
(1) based on a 2012 PWC report.