The Government has released a consultation paper as part of their commitment to ongoing reform of Australia’s corporate insolvency regime. Phoenix activity refers to both legitimate business rescue activities and serial insolvency to avoid debts. Illegal phoenixing generally involves controlling directors of an entity denying creditors access to the entity’s assets to meet any unpaid debts by stripping and transferring assets from one company to another to avoid paying liabilities.
Given the dynamic nature of early stage fintech businesses and start-ups more generally, where corporate structures can be dynamic and responsive, persons operating within this space should be aware of the possible introduction of phoenixing reforms. As noted in the consultation paper, phoenix activities can overlap with some business rescue activities, or other more accidental activities. If the reforms are introduced, then the activities of early stage companies and those dealing with early stage companies may be impacted. Relevantly, key proposed reforms are:
- the introduction of a Director Identification Number, by which enforcement agencies will verify and track current and historical relationships between directors and their entities;
- introducing a specific offence for illegal phoenixing activity in legislation and having ASIC (or a liquidator) have the power to issue notices to the recipient where they suspect such activity;
- limiting backdating of director appointments and resignations so that where a change in director notice is lodged more than 28 days (or another period) after resignation, the director may still be liable for misconduct occurring up to the point of lodgement;
- having an external administrator disregard “related creditor” votes received in relation to resolutions about removing or replacing an external administrator, to minimise the risk of related creditors frustrating unrelated creditors;
- extending promoter penalty laws, which apply to the promotion of tax avoidance and evasion schemes, to apply to promoters of facilitators of illegal phoenix activity;
- extending the director penalty notice regime to include companies’ outstanding GST obligations, (ie, directors would also be personally liable to pay the amount of GST owing, as well as PAYG withholding and compulsory superannuation contributions);
- increasing the ATO’s powers to garnishee an amount from a third party to cover the amount of requested security;
- introducing a mechanism for identifying and targeting high risk phoenix operators, who will then be subject to early intervention and prevention laws proposed to be introduced (ie, allowing the ATO to retain a tax refund where a person is designated as a high risk phoenix operator and requiring lodgement of all outstanding notifications affecting a tax liability before a refund is issued);
- appointing liquidators on a cab rank system for high risk phoenix operators, or establishing a government liquidator for small to medium size businesses, with a private liquidator appointed on an as needs basis; and
- removing the 21 day compliance period for a director penalty notice issued by the ATO for directors identified as high risk phoenix operators (during the 21 day compliance period, directors are known to dispose of personal assets to avoid such assets being acquired by the ATO).
Phoenix activity can have systemic impacts, such as a loss of market integrity, increased costs to regulators and unfair profit and tender winning advantage over other businesses, driving the Government’s need for reform. The paper highlights that illegal phoenixing activity is becoming increasingly complex and sophisticated, through non-payment of regulatory fees and the creation of complex corporate structures to group assets in certain subsidiaries.
Given that some restructuring activity and general compliance obligations (ie, risks posed by late lodgement of forms) may be subject to the reforms, fintech businesses, start-ups generally and those dealing with such entities (ie, investors, suppliers and other stakeholders) should be aware of the possible implications of the phoenixing reforms.