Illegal phoenix activity has a significant impact on the Australian economy with an annual estimated cost of up to $5.13 billion. While illegal phoenix activity has many victims, the impact on small business, particularly, can have a catastrophic effect on their operations as well as personal lives.
Illegal phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements.
Extensive recent reviews of the construction industry have highlighted illegal phoenix activity on a national scale. However, this activity is not limited to construction, and affects other industries such as service provision, manufacturing and hospitality.
As part of a national campaign to target illegal phoenix activity, Commonwealth Treasury plans to modernise business registers and introduce Director Identification Numbers (DINs). Draft legislation to amend the legal framework in this regard has been released for consultation.
The introduction of DINs will enable government regulators, including the Australian Securities and Investments Commission (ASIC), to map the relationship between individuals and entities and individuals and other people. The major benefit of the DIN is that the unique identifier stays permanently with the individual, even if their directorship of companies changes.
I welcome the Federal Government’s commitment to reform corporation and tax laws as a way to combat illegal phoenix activity as outlined in the 2018-19 Budget.
We support the proposed reforms to better protect creditors and small businesses from the losses suffered as a result of unscrupulous companies engaging in illegal phoenix activities.
There is enormous benefit to introducing DINs from a small business perspective, as it will offer a greater level of protection for suppliers and other creditors as company director ‘movements’ will be tracked.
While this is a great step forward, we believe that more should be done to hold company directors to account when they choose to repeatedly engage in conduct that amounts to illegal phoenix activity. Directors serve a very important role and their conduct can have grave effects on employees and creditors when they engage in illegal phoenix activity.
We are advocating to the Federal Government that further consideration be given to targeting serial offenders, by way of reversing the onus of proof on company directors that have a string of entities that they are ‘fit and proper’.
We are particularly interested in reducing the impacts on small business of illegal phoenix activity in Western Australia and eagerly await the final recommendations following the conclusion of the consultation period on 26 October 2018.
Small businesses interested in viewing the draft legislation and lodging submissions should visit the Treasury website.
Find out more about the new hotline combating corporate phoenixing and maintaining a level playing field for business.
For general business advice and guidance contact our free small business advisory service.