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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

The most useful and well researched and argued law reform report for many years – Phoenix Activity: Regulating Fraudulent Use of the Corporate Form

The most useful and well researched and argued law reform report for many years has been issued on what to do about unlawful company phoenix activity.  The research report – Phoenix Activity – Fraudulent Use of the Corporate Form – is that of the Melbourne Law School and Monash Business School, being their third and final. Their previous two reports identified and costed unlawful phoenix conduct.   

No justice can be done to this long report in these brief comments.  Suffice to say that this report, and the earlier two, put a very well argued case for reform, some recommendations so fundamental, that we wonder why they has not already been implemented. The fact that directors do not need to show any identification on registration of their companies is one gap that Professor Helen Anderson, of the research team, has written and spoken about now for some time. Even Senate inquiries have accepted the need for what Professor Anderson calls the director identity number (DIN).

It is wrong that legitimate business operators … might be driven out of business by those engaging in harmful phoenix activity

The report puts phoenix misconduct in a broad context, saying that:

Harmful phoenix activity, left unchecked, has the capacity to undermine Australia’s revenue base and the competitive ‘level playing field’. It is wrong that legitimate business operators, paying taxes, wages and other debts, might be driven out of business by those engaging in harmful phoenix activity. …

The aim of this report is to minimise the significant damage that is being done to the Australian economy by harmful phoenix activity without unduly inhibiting legitimate business rescues and beneficial entrepreneurialism. Our recommendations address phoenix activity that, whether presently legal or not, society should not tolerate because it causes unacceptable harm to others.

Comments

These only brief comments are offered.

The report properly focuses on up front disruption and regulation, rather than the typical political response of ex post regulation and enforcement.  As I said in relation to the control of crime, the proactive pre-emptive approach is the harder, in political terms. It is easier to give ASIC more enforcement moneys than to disturb the free and easy approach to corporate law that we presently have.

As the report says, the team’s

“approach is to attack the drivers of harmful phoenix activity from multiple angles, with a greater focus on ex-ante detection and disruption. At present, phoenix activity is easy, cheap, profitable and largely invisible, as a result of which there is little enforcement even where actions are available. We believe that implementing the measures outlined in this report would significantly counteract each of those drivers and reduce rates of harmful phoenix activity. At the same time, nothing we suggest will prevent genuine entrepreneurs from starting new companies, even after previous corporate failures”.

Recommendations

The main recommendations are listed as including, to:

  • Identify directors properly, the DIN.
  • Tighten the processes for incorporating companies.
  • Assist external insolvency administrators to collect information and to overhaul the process of external administrator reporting to ASIC.
  • Share information more effectively between regulators, including in relation to abandoned and deregistered companies. This is a constant issue which the relevant government agencies just do not manage well.
  • Make information about directors’ corporate histories available free-of-charge “where possible”.
  • Establish an online, free-of-charge, publicly searchable register of disqualified directors and associated companies.
  • Enhance information sharing with ‘allies’ such as super funds, trade unions and credit reporting agencies.
  • Improve collection of statistical data about phoenix activity. As I have earlier reported, the team found difficulty in extracting data about phoenix activity from ASIC and ATO statistics.

The report then makes recommendations under the heading of the need to “disrupt harmful phoenix activity” with ideas such as introducing for those with a history of corporate failures a new ‘halfway’ category of ‘restricted directorships’, listing these people on a publicly searchable register along with disqualified directors, with limits on the number of their concurrent directorships; to tighten the regime for disqualification from managing companies; to introduce independent valuations of asset transfers between related parties; to include GST in the ATO administered Director Penalty Notice (‘DPN’) regime and introduce DPNs into state taxation legislation; and to expand Single Touch Payroll to include payment of tax and superannuation.

The ex post “punish and deter” recommendations include to clarify what is a legally uncertain role of liquidators in the enforcement process and provide them with adequate funding to pursue investigations; to prioritise phoenix enforcement action and improve reporting of enforcement actions to stimulate general deterrence, and to expressly address the role of advisors, particularly pre-insolvency advisors.

The two final chapters of the report discuss other ideas and proposals related to phoenix activity in respect of which the team has not formulated specific recommendations, from Australia and overseas, that may warrant further investigation or consideration.

What won’t work

Usefully the report then lists a number of proposals that would not work to combat harmful phoenix activity or that may increase its risk – a phoenix offence, mandatory capitalisation, compulsory education for all directors and reinstating the tax priority in liquidations.

Interestingly, the report expresses concern about the effect that pre-pack liquidations, streamlined liquidations or a safe harbour defence might have on harmful phoenix activity. Some of these ideas are under present government law reform attention.

Final comment

This research was funded by the Australian Government through the Australian Research Council’s Discovery Projects funding scheme with the support of Melbourne Law School and Monash Business School.

The report is one of great value, well justifying its funding, carried out with a true academic open minded and objective approach, such that reliance on its findings and recommendations can be readily made.  Senate and other government reports provide some useful thinking and recommendations, but well-funded quality academic research gives confidence in the objectivity and the fearlessness of its recommendations.  The task is now for government to consider and accept or reject them, and give good reasons why.

Government law reform history in this area is not good, with many vested interests ready to oppose reform.  To which a response might be:

if you the government want to do something about what may be losses in the billions of dollars, apart from the impact on business confidence, governance and finance, then at least these major recommendations should be implemented.  If not, then you the government must openly accept the gross and harmful consequences of your inaction.

Photo: Reform Club, Pall Mall

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