How ASIC combats people who establish new companies with assets of a previous entity to avoid creditors

Greg Tanzer, Commissioner

This article was submitted to the Australian Institute of Company Directors for publication in the Company Director magazine in July 2014

Many company directors express frustration to me about so-called “phoenix” company activity, where smaller companies shut down their operations leaving creditors in the lurch, and then not long afterwards, the former directors set up a company operating a similar business with the same assets. What is not so well-known is that this activity may be illegal and the Australian Securities and Investments Commission (ASIC) is on the look-out for it.

To work out if someone is engaging in phoenix activity, regulators such as ASIC and the Australian Taxation Office (ATO) assess the conduct to see if that person has broken the law.

ASIC administers the Corporations Act 2001, so our purview is generally limited to conduct that involves the companies and their directors.
When a limited liability company fails, directors and shareholders are excused from being personally responsible for the company’s debts beyond their equity.

Genuine corporate failure, where a company has been responsibly managed but is eventually unable to pay its debts and needs to be wound up, is a legitimate use of the corporate form.

Illegal phoenix activity occurs when directors or officeholders transfer assets of a company to another company for little or no consideration. The directors leave the debts with the old company, often placing that company into administration or liquidation, leaving no assets to pay creditors.

A new company, often operated by the same directors and in the same industry as the old company, continues the business under a new structure. By engaging in this illegal practice, directors have intentionally and dishonestly denied unsecured creditors (often employees, providers of goods and services and the ATO) equal access to their entitlements, being the company’s assets, because they have been transferred to another entity. So how does ASIC combat illegal phoenix activity?

• The Assetless Administration Fund: This was set up by the government and is administered by ASIC. It finances preliminary investigations and reports by liquidators into the failure of companies with few or no assets, where it appears to ASIC that enforcement action may result from the investigation and report. The fund enables a liquidator to carry out a proper investigation and report, which then helps ASIC decide whether to take enforcement action.
• The Director Disqualification Program: Where directors have been involved in two or more liquidated companies that fail to pay 50 cents in the dollar within the past seven years, ASIC may take action to disqualify them from managing companies for up to five years. To do this, ASIC relies on liquidators’ statutory reports. It is important to note that a significant number of statutory reports liquidators have lodged with ASIC allege illegal phoenix activity. In 2012/13, ASIC disqualified 57 directors with 42 of the related liquidations funded by the AA Fund.
• The Liquidator Assistance Program: This program helps ensure directors of companies in administration provide information to the liquidator or ASIC about the companies they managed, to ensure an orderly liquidation. In 2012/13, 484 company officers were successfully prosecuted for 692 offences with fines and costs of $1.1 million ordered. 
• Deterring illegal phoenix activity: ASIC has identified around 2,500 directors who meet criteria suggesting potential involvement in phoenix activity and they have more than 7,000 registered companies. ASIC is using an external data service provider to financially risk rate those 7,000 companies to identify directors who may contemplate future illegal phoenix activity. Using that information, ASIC is engaging with directors of at-risk companies to explain their obligations as directors. We are also  using our compulsory powers to get information to determine if they are engaging in illegal phoenix activity. This surveillance campaign is targeting industries which appear at higher risk of phoenix activity, such as the construction industry. 
• Revamp of Report as to Affairs (RATA): We are revamping the RATA so as to ensure, as much as possible, that directors disclose details of transfers of assets and business prior to an external administration and that registered liquidators investigate and report to creditors and ASIC regarding those transactions. At its request, ASIC provided Treasury with potential law reform options that would make illegal phoenix activity a specific offence and strengthen ASIC’s power to prosecute illegal phoenix activity. Matters of law reform are for government to consider.

The message is clear: Phoenix activity affects many ordinary Australians, be they employees or creditors of failed companies. And, ASIC and other agencies, such as the ATO, are actively pursuing strategies to deter it.

If you have concerns that you may be the victim of phoenix activity, please report it to us.

Greg Tanzer is a commissioner with the Australian Securities and Investments Commission