ARITA Submission: Combating Illegal Phoenix Activity

ARITA has lodged a submission on the draft reforms to combat illegal phoenix activity.

In August 2018, The Treasury released draft legislation which includes "a range of measures to both deter and disrupt illegal phoenixing and more harshly punish those who engage in and facilitate this illegal activity". While ARITA supports the Government’s commitment to ongoing reform of Australia’s corporate insolvency regime, including the countering of illegal phoenix activity, we do not believe that the reforms in the Exposure Draft meets this objective at a practical level.

Consistent with our past consultation and submission on proposed illegal phoenixing reforms  late last year, we have again highlighted that registered liquidators are at the frontline in discovering and pursuing illegal phoenix activity. The success or otherwise of these, or any reforms with a similar goal, turns on how effectively they can be deployed by liquidators and then how regulators engage positively with those liquidators to pursue the directors and unregulated advisers who are the drivers of this illicit behaviour.

The key points made in ARITA's submission are as follows:

  • We strongly believe that a more appropriate response would be to strengthen existing anti-phoenixing tools within the Corporations Act rather than creating quasi-duplicate mechanisms.
  • We are disappointed that an actual “phoenixing” offence has not been created. The absence of this will hinder any effective communication strategy that may actually drive cultural change to call out and mitigate this behaviour.
  • A lack of adequate funding and documentary evidence available to liquidators will continue to hamper the effectiveness of the reforms.
  • ARITA has concerns regarding the breadth of transactions captured as a ‘creditor-defeating disposition’ and believes that dispositions in the ordinary course of business should be specifically excluded from the definition.
  • While ARITA supports an administrative recovery regime, an inherent lack of supporting documentation in relation to illegal phoenix transactions will limit any recovery by ASIC.
  • ARITA generally supports the reforms to prevent officers from backdating resignations or abandoning companies, subject to the addition of anti-avoidance mechanisms, but notes that its effectiveness is closely tied to the implementation of the proposed Director Identity Number.
  • ARITA supports the changes in respect of GST estimates and director penalties.
  • While supportive of the move for the ATO to retain tax refunds, ARITA believes measures are required to restrict the ability of the ATO to obtain a higher priority for its debt following the appointment of an external administrator.
  • ARITA supports the reforms to restrict related creditors’ voting rights to the value of the consideration paid for an assigned debt when conducting a poll for a resolution concerning the appointment or removal of an external administrator.

Further details in relation to these matters is provided in the body of ARITA's submission and details of the draft legislation is available on The Treasury website.