The Battle Against Harmful Phoenix Activity: An Australian Perspective

We are a team of academics at Melbourne Law School and Monash Business School who are investigating the regulation of phoenix activity as part of a project funded by the Australian Research Council. We recently published our third and final report which contains 32 recommendations aimed at enhancing the detection, disruption and deterrence of harmful phoenix activity, but without inhibiting legitimate business rescues. This post briefly describes phoenix activity and outlines the recommendations contained in the report.

Phoenix activity essentially involves one company taking over the business of another company that is wound up or abandoned where the controllers of both companies are the same people or their associates – Newco arising from the ashes of Oldco, having unburdened itself of Oldco’s debts and other obligations. In practice, phoenix activity has many guises. In our first report, Defining and Profiling Phoenix Activity, we explain the various forms of phoenix activity, ranging from legitimate business rescues to deliberate and repeated illegal conduct. PricewaterhouseCoopers has estimated that phoenix activity costs the Australian economy $1.78 to $3.19 billion per annum. In our second report, Quantifying Phoenix Activity: Incidence, Cost, Enforcement, we conclude that, although precise quantification of harmful phoenix activity is not possible due to a lack of available data, it is nonetheless a significant problem that justifies the commitment of substantial government resources.

Harmful phoenix activity is prevalent because it is largely invisible, easy to carry out, and often very profitable. The recommendations in our report aim to counteract each of these drivers.

To make phoenix activity more visible, we recommend that:

• directors obtain password-protected director identification numbers (‘DINs’) after proving their identity with 100 points of identification;
• regulators examine directors’ corporate histories when they incorporate new companies;
• regulators and directors provide additional information to liquidators in relation to directors’ corporate histories and asset transfers by insolvent companies;
• the penalties for directors failing to inform and assist liquidators be substantially increased;
• liquidators provide specific phoenix-related information in statutory reports to regulators;
• regulators improve the phoenix-related advice and complaint pages on their websites;
• regulators share information with each other more effectively;
• regulators make information about companies and directors available to the public free-of-charge, subject to privacy considerations;
• regulators establish an online and free-of-charge register of restricted and disqualified directors;
• regulators, superannuation funds and trade unions engage in information sharing;
• regulators provide information about corporate debts to credit reporting agencies;
• regulators improve their collection of statistical data about phoenix activity.

To make harmful phoenix activity less easy to accomplish, we recommend that:

• directors that have been involved in five corporate failures within ten years be automatically subject to a ‘restriction’ period of five years, resulting in limits on concurrent directorships, increased reporting requirements and heightened surveillance;
• regulators make better use of existing director disqualification powers;
• the limit on administrative disqualification of directors be increased from 5 to 10 years;
• taxation and employment regulators be given the power to seek court-ordered disqualification of directors;
• the penalties for managing companies whilst disqualified be increased substantially;
• regulators check whether people who are applying to run businesses are subject to director restriction or disqualification;
• independent valuations of related party asset transfers be introduced;
• the backdating of directorships be limited to three months;
• taxation collection mechanisms be expanded so as to reduce the amount of corporate debt and employee entitlements that remain unpaid.

To counter the profit motive behind harmful phoenix activity, we recommend that:

• liquidators be provided with additional funding to investigate, report and take action against director misconduct;
• regulators make better use of existing powers to take enforcement action;
• regulators improve public reporting of their enforcement activities to stimulate general deterrence;
• ineffective and unclear legislative provisions be amended;
• the penalties for breaches of directors’ duties and employment laws be increased substantially;
• regulators be given broader powers to seek compensation and disgorgement remedies to ensure that victims are compensated and wrongdoers are stripped of profits;
• regulators and courts take stronger enforcement action against professional and unqualified advisors who facilitate harmful phoenix activity.

Click on this link to access the full report and recommendations.

Helen Anderson is a Professor of Law at the University of Melbourne.

Ian Ramsay the Harold Ford Professor of Commercial Law at the University of Melbourne.

Michelle Welsh is a Professor of Law at Monash Business School, Monash University.

Jasper Hedges a Research Fellow in the Centre for Corporate Law & Securities Regulation at the University of Melbourne.