Guerilla tactics needed against phoenix misconduct

While the government is considering the various submissions on phoenix reforms, these quick thoughts came to mind, involving both government and computer selected liquidators, bankruptcy, public access to data, silo approaches, and modern slavery.

And battle terminology. 

The pervasive impact of phoenix and corporate misconduct continues to come up in a range of inquiries – the Productivity Commission’s Shifting the dial, corporate tax fraud, the regular PJC hearings oversighting ASIC; the JSC on a modern slavery law, and more, including in recent case law.

In the modern slavery hearing, the ACTU referred to Australia’s corporate scene, the need for “companies having to disclose what they are doing to make sure that consumers and civil society groups can be reassured that they are doing the right thing”, that action is needed in relation to companies that “keep breaking the rules”, which then phoenix, “shut themselves down and reappear again by going bankrupt”.

Senator Gallacher rightly said that “transparency would make these companies visible to either the end user or the product line”, with which Ms Maksimovic of the ACTU agreed:

“we just do not know what is going on. It is really hard. We have worked on FOIs and we have tried to work with registries et cetera, but we do not have the resources to do this necessarily. Often it is really not possible to find out what is happening because of the way that companies are now constructed, where there is a very complex set of subsidiaries and labour hire. There is a whole range of these things”.

In other words, public information on the business and corporate environment in Australia is quite opaque, providing many opportunities for phoenix activity and other corporate defaults.

The terms transparency, ‘sunlight’ and open access to information sum up themes of law reform that are necessary. Unless and until that corporate environment is improved, the issue with phoenix misconduct will continue to exist.

A commonly stated view that rather than creating new laws, the present laws need enforcement and higher penalties ignores the opaque environment in which the regulators, creditors and the public have to operate.

Priority reforms needed are director biometric identification, open access to ASIC data, access to details of beneficial ownership, and payment of employee taxes by way of single touch payroll, for the moment. An internet based insolvency portal – TIP – is also needed.

Of importance but second in priority are measures that serve to enforce the misconduct that occurs regardless, both for the purpose of recovery of moneys, if possible, and for the purposes of general and specific deterrence. Such laws are necessary but are invariably promoted as being of first priority, which they are not.

A particular issue raised by Treasury is a phoenix hotline. If established, and it may serve a purpose, it should be run independently of any of the major players – ATO, ASIC, DE, FWO -given their on-going irremediable silo approach to regulation.  The obvious lack of communication between agencies in the implementation of the ILRA 2016 is an example. See The Silo Effect, by G Tett.

AFSA would be a worthy independent agency to be given this task, noting its ability to manage proceeds of crime, PPS and Commonwealth trustee roles, as well as bankruptcy.

An issue however is ASIC’s comment that

“the level of understanding of what is phoenix activity in the community is quite low” and that creditor accusations have been made of “deeds of company arrangement, which are appropriate workouts under the Act”.

That is, the hotline may create unrealistic expectations. Again, AFSA has managed this in bankruptcy through its useful pre-referral inquiries facility for offences.

The use of a process like s 139ZQ of the Bankruptcy Act would be worthwhile, if it could be attached to some sufficiently useful offence definition.  It is interesting that despite s 139ZQ being introduced in 1992, corporate insolvency’s ignorance of bankruptcy law has meant that it has left it until now to consider this: see again The Silo Effect, by G Tett.

Reliance on expectations of general deterrence is problematic, because it depends on prompt regulatory action, and outcomes, which do not seem feasible.  Disruption is a valid focus, accepting that no crime can ever be fully prevented. See the very good evidence from criminologists given to Senate Committee and its reportLifting the fear and suppressing the greed’.

 The whole circumstance of companies being “abandoned” needs legal and regulatory attention. It is a consequence of the lack of a government liquidator, the lack of director identity requirements, the lack of funding (say by way of a levy on company registration), and the legal deficiencies identified by Treasury.

As to the appointment of liquidators on a cab rank basis, ASIC has commented on its knowledge of UK experience, that “basically, you have a fixed price so that you can’t what I call ‘rob the grave’.

Mr Falinski: And they were also talking about a cab rank rule.

Mr Medcraft: They were—a cab rank rule. We could share that, if you haven’t seen it, with you. That might give you some ideas. It was quite interesting, because at the big end it’s many things the government has announced, in dealing with large issues, but at the small end it’s often this problem. And how do you deal with this problem I’m talking about? There’s a cab rank rule and a fixed price”.

While that may be solely known by ASIC, what is known is that there are other alternate bases of selection of practitioners in Europe, for other reasons, to secure the perception of independence than can be challenged when the practitioner is chosen by the directors. For example, several EU countries adopt randomised computer based methods of appointment. Finkelstein J usefully analysed the issues in CBA v Fernandez.

As to a government liquidator, Australia’s regime suffers from the lack of a government role in relation to corporate insolvency, in contrast to other comparable jurisdictions: see What do we expect of insolvency and of insolvency practitioners? Harris & Murray, INSOL, The Hague 2013.

Insolvency inherently needs a government role given the limited funds available, or in many cases, no assets, often by design.  The private market necessarily relies upon assets from which to draw remuneration.

The lack of a government liquidator only adds to the problem of abandoned companies. Abandonment is often the only real option for a director without assets in the company or personal funds. It should also be noted that ASIC reports that it used its powers to wind up abandoned companies, under s 489EA, six times in 2016-2017.

A view that it is the creditors who should fund liquidations, either from remaining assets available, or from their own funds, is a based on a narrow and invalid view of the purpose of insolvency, from economic, social, and business perspective.

The Melbourne Monash Phoenix Reports refer to the team’s difficulties in finding consistent data, including from the ATO and ASIC.  At the recent PJC inquiry, on 11 August 2017, ASIC reported that it “targets directors for surveillance who have had a history of involvement in failed companies”, using external data to help its risk targeting.

Senate and other inquiries continue to ask for good data.  The government should reconsider its rejection of the 2010 Senate Committee’s recommendation [17] to establish a “unit responsible for gathering, collating and analysing data on a range of corporate and personal insolvency matters”. Importantly, “there should be no charge for accessing that data”.

AFSA has the appropriate expertise.

The use of terms like “combatting”, “killing off” and “stiffer penalties” does not give comfort to any appreciation in government or the ‘industry’ that more refined and directed reforms are needed. The Melbourne Monash Phoenix Reports better focus is on “regulating”, using a variety of disruptive techniques. If Treasury and others want to use warlike terms, “guerrilla tactics” would be better.

Note: These comments broadly come from my detailed submission to Treasury.

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