The Australian Securities and Investments Commission has recently signalled, along with the Australian Tax Office, its intent to ramp up investigations against directors with a history of operating failed companies, to counteract ‘phoenix activity’.

This intent is on the back of the Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth) (Phoenixing Act) as introduced in 2012.

What is phoenix activity?

Simply put, ASIC describes ‘phoenix activity’ as when companies go into liquidation, or are abandoned by the directors without properly winding it up, where the assets of that company are transferred to another company, usually under a similar name to the abandoned company.

This approach is used by directors to engage both in fraudulent activities and to evade tax and other liabilities, with no recourse offered to parties owed money.

It impacts customers, creditor’s, and the Australian economy by as much as AU$3 billion a year.

What is ASIC doing?

ASIC has indicated that it seeks to combat directors engaging in ‘Phoenix’ activity through:

  • Increasing investigations in directors with a history of such conduct (with roughly 1,400 companies already identified);
  • Enlisting the directors penalty regime, including the removal of directors involved with two or more failed companies;
  • Targeting the building, construction, labour hire, transport, security and cleaning industries;
  • Ordering the winding up of companies it considers to be abandoned (as introduced to part 5.4C of the Corporations Act);
  • Liaising with the ATO, apply the directors penalty regime making directors personally responsible for the failure to meet certain tax obligations, PAYG and super guarantee obligations.

What are indicators of phoenix activity?

Common indicators include:

  • A company failing to pay its debts regularly;
  • When directors soon reappear after the failure of a company, with a new company, as controlled by substantially similar directors and management.