ARITA's submission on combatting illegal phoenixing

28/02/2018

In September 2017 the Federal Government consulted on ‘reforms to the tax and corporations law to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers.’

Specific measures on which the Government consulted included:

  • Specific phoenixing offences to better enable regulators to take decisive action against those who engage in this illegal activity;
  • The establishment of a dedicated phoenix hotline to provide the public with a single point of contact for reporting illegal phoenix activity;
  • The extension of the penalties that apply to those who promote tax avoidance schemes to capture advisers who assist phoenix operators;
  • Stronger powers for the ATO to recover a security deposit from suspected phoenix operators, which can be used to cover outstanding tax liabilities, should they arise;
  • Making directors personally liable for GST liabilities as part of extended director penalty provisions;
  • Preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors; and
  • Prohibiting related entities to the phoenix operator from appointing a liquidator.

The Government also consulted on how best to identify high risk individuals who will be subject to new preventative and early intervention tools, including:

  • A next-cab-off-the-rank system for appointing liquidators;
  • Allowing the ATO to retain tax refunds;
  • Allowing the ATO to commence immediate recovery action following the issuance of a Director Penalty Notice.

ARITA’s submission

The key points of ARITA’s submission were:

  • There already exist a variety of laws and penalties for transactions, acts and omissions which either constitute or facilitate illegal phoenix activity.  Rather than creating new laws, the present laws need enforcement and stiffer penalties.
  • There is already a system for designating ‘high risk’ operators of companies: the disqualification regime in Part 2D.6 of the Corporations Act 2001 (Cth) (‘the Act’).  That regime should be enforced more rigorously to disqualify high risk individuals from managing corporations.
  • Registered liquidators are part of the solution to addressing illegal phoenix activity. Apart from the many statutory reports they provide to ASIC which identify misconduct, which generally are not acted upon, liquidators are often hampered by inadequate funding and a lack of documentary evidence (by reason of breaches of laws relating to books and records) which means that phoenix activity often passes unchallenged.
  • We support the introduction of an administrative recovery notice regime in corporate liquidations similar to the present s 139ZQ of the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’), which will provide a more expedient and cost-effective manner of pursuing voidable transactions, including those transactions which reflect illegal phoenix activity (eg, uncommercial transactions).
  • We support measures to prevent miscreant directors abandoning companies or ‘gaming the system’ by backdating resignation notices.  We support attaching the responsibility for notification of resignation of directorships to the directors themselves rather than merely the company concerned.
  • A cab rank or ‘roster’ system for the appointment of external administrators was rejected by the Harmer Report and is fraught with issues of practicality, timeliness and cost.  A cab rank appointment system is an anti-competitive measure which sits in tension with recent law reforms introduced by the Insolvency Law Reform Act 2016 (Cth) (‘ILRA’) enhancing the rights of creditors to replace external administrators appointed under a voluntary system.
  • We support the limited exclusion of related creditor voting rights on resolutions for the removal and replacement of an external administrator, which will ensure the new and improved ILRA rights of creditors to replace external administrators work better and as intended.
  • ARITA does not support of the notion of a Government liquidator to conduct external administrations.  The existing profession of private, registered liquidators are better placed – in terms of efficiency, competence, expertise and costs – to conduct external administrations.  A Government liquidator would also confront complications borne from the fact that the Commonwealth Government is often a major creditor in external administrations.  
  • Rather than creating new administrative (recurring) expenditure through a cab rank system or Government liquidator, Government funding and resources should be devoted to enforcement of present laws and providing liquidators of assetless companies with the funding required to pursue illegal phoenix activity.
  • We are concerned by proposals which seek to elevate the pre-liquidation rights and status of Government creditors (principally the Australian Taxation Office) above those enjoyed by other general unsecured creditors

Submissions closed in late October 2017.  ARITA’s full submission can be accessed below.