Chapter 1


Chapter 1

Introduction

Referral and conduct of the inquiry

1.1        On 22 March 2012, the Senate referred the Corporations Amendment (Phoenixing and Other Measures) Bill 2012 to the Economics Legislation Committee for inquiry and report.

1.2        The Bill seeks to amend the Corporations Act 2001 to:

  • provide the Australian Securities and Investments Commission (ASIC) with the administrative power to wind up a company that has been abandoned in certain circumstances;
  • include a regulation making power to prescribe methods of publication of notices relating to events before, during and after the external administration of a company; and
  • make technical and other minor amendments relating to the Paid Parental Leave scheme and the powers of the court in relation to company reinstatements.

1.3        The committee advertised the inquiry on its website and wrote to interested parties and relevant Commonwealth departments and agencies inviting submissions. The committee received eight submissions, which are listed in the Appendix. The submissions have been published on the committee's website.

Outline of the report

1.4        This report is divided into two chapters. The remainder of this chapter provides an overview of the major issues relevant to the Bill: first, fraudulent phoenix activity and the impact it can have on the employees of companies that engage in this conduct, and second, the proposals to provide for the electronic publication of corporate insolvency notices. The provisions of the Bill are examined in Chapter 2, which also includes the committee's recommendations.

Phoenix activity

1.5        Fraudulent phoenix activity can take many forms, but in general it involves:

... the evasion of tax and other liabilities such as employee entitlements through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities.[1]

1.6        Characteristics of fraudulent phoenix activity often include the accumulation of debts without any intention of them being repaid and the transfer of assets by the directors of the indebted company into a new company, of which they are also directors. Following the liquidation of the company:

Like the mythical bird, the phoenix, these businesses rise from the ashes and are 're‑born' as new entities which essentially continue running the same business.[2]

1.7        The consequences of fraudulent phoenix activity can be wide-reaching. The most visible impact is that generally there are insufficient assets left in the company to cover the debts owed to creditors and employees' entitlements. However, there are also less visible consequences. Other businesses can be impacted while the company is operating, as fraudulent phoenix activity provides a significant unfair competitive advantage for those engaging in it. Government revenue is also impacted—it is estimated that phoenix activity could be costing the government around $600 million each year in lost revenue.[3] The cost to the broader economy is difficult to ascertain but is likely to be significant. In 2009, the Australian Taxation Office reported that the overall cost to the Australian economy of phoenix and related practices had been estimated at between $1 billion and $2.4 billion a year.[4]

1.8        Adequately defining what constitutes fraudulent phoenix activity without other events such as legitimate business failures being captured inadvertently, however, has been recognised to be 'inherently difficult':

A genuine business failure where the business has been responsibly managed and subsequently continues using another corporate entity is a legitimate use of the corporate form. This legitimate use of the corporate form should be contrasted with dishonest practices that abuse the corporate form and the privilege of limited liability as a means of generating personal wealth or an unfair competitive advantage. The abuse of the corporate form to avoid payment of taxation liabilities ... has significant implications for revenue. In addition the non payment of employee entitlements is also often a feature of such activity.[5]

1.9        In its submission, Treasury noted that phoenix activity can also be difficult to detect because 'it can take a number of forms within a corporate structure'. Accordingly, Treasury argued that:

... to effectively combat phoenix activity, regulatory tools need to be both broad based and flexible to enable the early detection of phoenix activity and to minimise the adverse impacts for stakeholders, such as creditors, employees and consumers.[6] (emphasis in original)

1.10      On 14 November 2009, the then Assistant Treasurer, Senator the Hon. Nick Sherry, released for consultation a proposals paper which canvassed possible amendments to the taxation and corporations law to address fraudulent phoenix activity.[7]

1.11      During the 2010 election campaign, the government announced the Protecting workers' entitlements package, part of which committed the government to strengthen ASIC's powers to ensure employees affected by phoenix companies get timely access to their unpaid entitlements.[8]

Phoenixing and workers' entitlements

1.12      The General Employee Entitlements and Redundancy Scheme (GEERS) is a payment scheme administered by the Department of Education, Employment and Workplace Relations (DEEWR). The scheme is designed to assist eligible employees[9] who have lost their employment due to the liquidation or bankruptcy of their employer and who are owed certain employee entitlements.

1.13      Under GEERS, individuals may be able to receive:

  • up to three months unpaid wages for the period prior to the appointment of the insolvency practitioner;
  • unpaid annual and long service leave;
  • up to a maximum of five weeks unpaid payment in lieu of notice; and
  • up to a maximum of four weeks unpaid redundancy entitlement for each completed year of service the individual had with their employer.[10]

1.14      The rules governing GEERS, however, have implications for employees affected by phoenix activity. In his second reading speech on the Bill, the then Parliamentary Secretary to the Treasurer, the Hon. David Bradbury MP, explained how at present it is more difficult or even impossible for employees of a phoenix company to access payments under GEERS:

Under GEERS, employees of a failed company are only able to access the scheme where the company that has employed them fails and is placed into liquidation. However, sometimes the directors of a failed company simply abandon the company, rather than go through the appropriate processes to wind up the company. At present where this occurs, employees are not able to access their unpaid entitlements under GEERS.

If a company has been abandoned but has not yet been deregistered, employees (or ASIC on their behalf) currently have to apply to the courts and incur legal costs in order to place the abandoned company into liquidation before they can access GEERS.

This is further complicated by the fact that where the abandoned company has been deregistered by ASIC or by its members, ASIC or the company's employees have to apply to the courts to reinstate the company and only once the company is reinstated so that it can be placed into liquidation could any potential employee eligibility for GEERS be triggered.[11]

1.15      The government has indicated that GEERS will be replaced with the Fair Entitlements Guarantee. Unlike GEERS, which operates under administrative arrangements, the Fair Entitlements Guarantee will be contained in legislation.[12]

Publication of corporate insolvency notices

1.16      The other main reform contained in the Bill relates to the publication of corporate insolvency notices. At present:

There are a range of notices that, in the course of external administrations, must be published in the print media. These public disclosure obligations are in addition to obligations for petitioning creditors and for external administrators to communicate directly with known creditors to inform them of certain events.[13]

1.17      In 2008, the Corporations and Markets Advisory Committee (CAMAC) completed a review of a number of issues related to insolvency law. Its report recommended that public notices relating to external administration should be moved from the print media to a website administered by ASIC. CAMAC argued:

Electronic publication is potentially a more effective way than print publication to bring information to the notice of people who may have an interest in the fact that a company is in external administration. It should afford savings in cost and time. An appropriate transitional period would be sensible, to allow interested parties time to adjust ... In addition to the mandatory disclosure obligations in force from time to time, it will also remain open to external administrators to choose to publish notifications in the print media or on other websites (for instance, the website of the company under external administration). Furthermore, media reports will continue to be a source of information to the public.[14]

1.18      On 19 January 2010, the then Minister for Financial Services, Superannuation and Corporate Law announced that the government, in accepting substantially all of CAMAC's recommendations, would facilitate the future possibility of notices being published by alternative methods.[15]

1.19      On 14 December 2011, the government released a proposals paper aimed at improving corporate and personal insolvency regulation.[16] This paper detailed the proposed amendments which would lead to an external administration notices website being established by 1 July 2012.

1.20      In his second reading speech on the Bill, the then Parliamentary Secretary to the Treasurer observed that the publication of corporate external administration notices on a single website would result in some noteworthy benefits for external administrations and creditors:

There are significant costs to external administrations in complying with these obligations. These costs are ultimately borne by creditors through reduced returns. There are also costs to creditors in monitoring numerous newspapers for relevant notifications—particularly as there is no set newspaper or day of the week on which notices must be published ... Online publication of notices will replace approximately 53,000 newspaper advertisements over the next four years, saving external administrations around $15 million over that same period.[17]

Examination by the Senate Standing Committee for the Scrutiny of Bills

1.21      The Senate Standing Committee for the Scrutiny of Bills assesses legislative proposals against a set of accountability standards that focus on the effect of proposed legislation on individual rights, liberties and obligations, and on parliamentary propriety. The Scrutiny of Bills Committee considered the Bill in its second Alert Digest of 2012. It made no comment on the Bill.[18]

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