Monday, April 22, 2024

Government’s phoenix rules have ‘no chance’ of succeeding

An expert in insolvency law has written off the federal government’s new reform package aimed at ‘phoenix’ activity among businesses.

‘Phoenixing’ refers to the transferring the assets of a failed company to another company that has no liabilities.

The government says its reforms will “deter and disrupt the core behaviours of illegal phoenixing”. The key elements of the government’s draft legislation are:

  • Creating new phoenix offences to target those who engage in and facilitate illegal phoenix transactions.
  • Preventing directors from backdating their resignations to avoid personal liability.
  • Preventing sole directors from resigning and leaving a company as an empty corporate shell with no directors.
  • Restricting the voting rights of related creditors of the phoenix company at meetings regarding the appointment or removal and replacement of a liquidator.
  • Making directors personally liable for GST liabilities, as part of extended director-penalty provisions.
  • Extending the ATO’s existing power to retain refunds where there are outstanding tax lodgements.

‘No chance’

But Sewell & Kettle principal Ben Sewell, an insolvency law expert, says the government’s draft legislation is off the mark.

“There is no chance that this will dent the scale of phoenix activity in Australia,” he said. “Phoenix operators will be able to continue business as usual with minimum fuss.

“Fair play to the government for these reforms. But what has really changed? Not much. There isn’t any funding for regulation and there isn’t a definition of what phoenix activity actually is. If a liquidator has no funding when they’re appointed, no one can compel them to investigate and pursue phoenix activity.”

Mr Sewell says prominent academic research has been highly critical of the government’s approach to phoenix activity in the past.

“A well-respected group of academics called the Phoenix Research Team recently produced three important research papers into phoenix activity,” he said. “They called for a new definition of phoenix activity, active enforcement and new legislation. The key recommendations have not been pursued by the government.

“I predict a small change. But the difficult choices that the Phoenix Research Team recommended have not been followed by the government. The government hasn’t even defined ‘phoenix activity’ in the legislation. Serious researchers of phoenix activity know that more specific legislation and policy are required.”

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