Coalition Senators' Dissenting Report
1.1
The Coalition is strongly opposed to fraudulent phoenix activity and
supports all appropriate measures to stamp out this practice.
1.2
Phoenix activity is typically associated with directors who transfer the
assets of an indebted company into a new company of which they are also
directors. The directors then place the initial company into administration or
liquidation with no assets to pay employee entitlements or to pay creditors
such as contractors and the Australian Taxation Office. Meanwhile the same
directors continue the business using the new company structure.
1.3
A Treasury Proposals Paper issued in November 2009 described the systematic
way that such activity is conducted as follows:
Fraudulent phoenix activity 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]
1.4
Coalition Senators recognise that phoenix activity can cause significant
harm to workers and small business people who are denied their legitimate
entitlements. If left unchecked it can erode the reputation of Australia’s
strong business community and reduce confidence in our world class corporate
regulatory framework.
1.5
However we are concerned that the government's approach to this
important public policy matter is confused, ad hoc, piecemeal and not
appropriately targeted.
1.6
Despite repeated attempts at introducing legislation to target "phoenix
activity" the government has still not got it right.
1.7
Last year, the government included a series of different measures
targeting some aspects of phoenix activity in the Tax Laws Amendment (2011
Measures No. 8) Bill 2011 and the Pay As You Go Withholding Non-Compliance Tax
Bill 2011.
1.8
After examining these Bills, the House of Representatives Economics
Committee made a unanimous and bipartisan recommendation that the government
not proceed with those provisions. The Committee specifically commented as
follows:
However, the committee notes concerns from the business
community and its representatives that the Bills potentially apply to the broad
range of directors whether engaged in phoenix activity or not. The committee
recommends that the Government should investigate whether it is possible to
tighten the provisions of the Bills to better target phoenix activity.[2]
1.9
The government subsequently withdrew the provisions from the Bill and
has yet to provide any indication as to how they will tighten the provisions to
better target phoenix activity as recommended by the Committee.
1.10
The latest provisions in the current Bill are also problematic and the
Coalition Senators are opposed to the Bill in its current form.
No definition of 'fraudulent
phoenix activity'
1.11
In its submission to the Committee, the Australian Institute of Company
Directors has expressed concern with the general thrust of the changes dealing
with 'phoenix' activities.
1.12
In particular they have highlighted that no attempt has been made in
either this Bill or any other Bill so far provided by the government to define
the term 'fraudulent phoenix activity'. The AICD also emphasized that the
government's approach in this policy area is considered to be poor drafting
practice:
Importantly, we note that although the measures in these
Bills have been described as targeting phoenix activity, no attempt has been
made in any of the Bills to define 'fraudulent phoenix activity.' We have
previously stated that this definition must incorporate a dishonest intention
on the part of the directors to defraud or deceive creditors.
We are firmly of the view that if new legislation is being
introduced to target a specific problem, then the legislation must clearly
define the issue sought to be addressed and specifically regulate that problem.
Rather than do this, the recent approach to address fraudulent phoenix activity
has been to draft broad provisions which impose liability or give extensive
powers to the regulators, followed by the insertion of limited exceptions for
those inadvertently caught within the provisions. This approach is universally
considered poor drafting practice.[3]
1.13
Coalition Senators are strongly concerned that the government, whilst
attempting to regulate and target phoenix activity, has still not made any
meaningful attempt to define what constitutes 'phoenix activity' in any
legislation.
1.14
It is fundamental to ensure that any fraudulent activity being targeted
is clearly defined.
1.15
A clear definition would protect legitimate companies and ensure that
they do not inadvertently get caught up in what is quite draconian legislation
where, under the proposed legislation, ASIC would be able to unilaterally move
to liquidate a company.
Concerns with broad increase in
ASIC powers
1.16
Coalition Senators are concerned about the significant increase in ASIC
power represented by the Bill.
1.17
As Australia’s corporate regulator ASIC has a rightful role to play in
properly overseeing and enforcing existing legislation.
1.18
But such rules and regulations need to be properly targeted to ensure
that they achieve the original intent of the legislation.
1.19
However, the increased powers provided to ASIC under this Bill are not
confined to circumstances where phoenix activity is suspected.
1.20
In its submission to the Committee the AICD highlighted this concern as
follows:
The Bill now the subject of the Senate Economics Legislation
Committee's review, forms one part of the Government's recent initiatives.
Despite the title of the Bill being "Phoenixing and Other Measures",
the provisions marked as providing mechanisms to address possible fraudulent
phoenix activity are not in fact limited to circumstances where fraudulent
phoenix activity is suspected.
For example, pursuant to section 601AH of the Corporations
Act ASIC has the power to "reinstate the registration of a company if it
satisfied that the company should not have been deregistered", the Bill
then provides that ASIC may order the winding up a company if "ASIC has
reinstated the registration of the company under subsection 601AH(1) in the
last 6 months" and "ASIC has reason to believe that making the
order is in the public interest." These provisions apply regardless of
whether fraudulent phoenix activity is suspected and give ASIC broad powers to
reinstate companies and then order a winding up regardless of whether the
company has previously been deregistered appropriately.
Given that phoenix activity is often characterised as
"the deliberate, systematic and sometimes cyclic liquidation of related
corporate trading entities" we anticipate that ASIC will be more likely to
use its winding up powers to investigate uncommercial transactions and deal
with abandoned companies rather than to resolve issues relating to phoenix
activity (where operators commonly put their companies into liquidation).
While we have no objection to protecting workers entitlements
in abandoned companies or ASIC actively seeking to curtail phoenix activity
using its existing powers, we caution the legislature against increasing ASIC's
power to 'target phoenix activity' when the powers are not confined to
suspected instances of phoenix activity and apply much more broadly. If the
purpose of particular amendments is to address phoenix behaviour then ASIC's
power should be triggered only when phoenix behaviour is suspected and the
legislation should unequivocally reflect this purpose.
If instead, the Bill is primarily designed to confer broad
powers on ASIC or to address other related issues, then the Bill should be the
subject of analysis, scrutiny and debate on the real reason for legislative
change and should not be referred to as a "phoenixing" measure.[4]
(footnotes omitted)
1.21
Coalition Senators believe that the powers conferred on ASIC under
measures to detect fraudulent phoenix activity should be properly calibrated to
achieve this aim and should not be used to provide far broader powers without
appropriate scrutiny.
Lack of utilisation of existing
powers
1.22
Another major issue identified during this inquiry as contributing to
the extent of undetected or effectively unpunished phoenix activity is that
regulators are not fully utilising the existing powers that are currently available
to them.
1.23
In its submission to the Committee, Master Builders Australia provided
one example of the lack of appropriate enforcement of existing laws in this
context:
Tidy up the enforcement of laws that ensure that companies
are complying with existing corporate regulations. A prime example of
widespread non‑compliance is the account keeping provisions within the
Corporations Act. Such laws are clearly important for early determination of
insolvency and timely collection of taxpayer obligations. Funding must be
provided for the effective monitoring of this important function to limit the
need to be concerned about the consequences of non-compliance, namely phoenix
activity, non-payment of employee entitlements and a revenue shortfall.[5]
1.24
In this context Coalition Senators consider that the need for additional
new ASIC powers appears somewhat superfluous if they are not currently fully
utilising their existing powers either because of a lack of resources or
otherwise.
The government’s ad hoc and
piecemeal approach
1.25
Coalition Senators are also concerned that the government seems to be
taking an ad hoc and piecemeal approach to the targeting of fraudulent phoenix
activity by introducing many pieces of related legislation in an uncoordinated
manner, such as the current Bill and the previous Bill that was so heavily
criticised by the House Economics Committee.
1.26
Apart from these Bills the government has recently also released
separate Exposure Draft legislation dealing with matters associated with
fraudulent phoenix activity. These additional measures are including the
Exposure Draft of the Corporations Amendment (Similar Names) Bill and
the Exposure Draft of the Tax Laws Amendment (2012 Measures No. 2) Bill
2012: Companies’ non-compliance with PAYG withholding and superannuation
guarantee obligations.
1.27
Coalition Senators strongly recommend that the government ceases this
ad hoc and piecemeal approach, withdraws the current Bill and instead
engages in meaningful consultation with stakeholders to address their
legitimate concerns and to determine a comprehensive and co-ordinated
legislative approach to the very important public policy matter of combating
fraudulent phoenix activity.
1.28
As a starting point it should consider the proposals paper on combating
phoenix activity released in November 2009 by Senator Sherry who was then
Assistant Treasurer—one of five Assistant Treasurers in the short history of
this Labor government.
1.29
Coalition Senators note that of the 11 proposals for combating phoenix
activity in that proposals paper none are reflected in this Bill.
1.30
These 11 proposals may in fact be a good place for the government to
start when they go back to the drawing board on this policy.
1.31
On the basis of all of the above, Coalition Senators recommend that the
Senate oppose this Bill.
Recommendation 1
1.32
That the Senate oppose this Bill.
Recommendation 2
1.33
That the government undertakes a comprehensive and co-ordinated
legislative approach to combating fraudulent phoenix activity that includes an
appropriate definition of 'fraudulent phoenix activity'.
Recommendation 3
1.34
That regulators including ASIC ensure that they fully utilise existing
legislative and regulatory powers to combat fraudulent phoenix activity.
Recommendation 4
1.35
That any proposed broad new powers for regulators such as ASIC that
would apply to corporations and directors that are not engaged in fraudulent phoenix
activity be subject to proper public scrutiny and debate rather than be bundled
into legislation that is supposed to apply to only one discrete policy area.
Senator David Bushby
Deputy Chair
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