Referral and conduct of the inquiry
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.
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.
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
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.
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.
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.
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.
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.
Adequately defining what constitutes
fraudulent phoenix activity without other events such as legitimate business
failures being captured inadvertently, however, has been recognised to be
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.
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. (emphasis in original)
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.
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
and workers' entitlements
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
who have lost their employment due to the liquidation or bankruptcy of their
employer and who are owed certain employee entitlements.
Under GEERS, individuals may be able to
- 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.
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
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
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.
Publication of corporate insolvency notices
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.
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
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.
On 14 December 2011, the government
released a proposals paper aimed at improving corporate and personal insolvency
This paper detailed the proposed amendments which would lead to an external
administration notices website being established by 1 July 2012.
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.
Examination by the Senate Standing Committee for
the Scrutiny of Bills
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.
Navigation: Previous Page | Contents | Next Page
Back to top