“Enforcement agencies have long been aware of the role that the abandonment [deregistration] of companies plays in illegal phoenix activity. In 1995 the Australian Securities Commission (ASIC’s predecessor) estimated that 92 per cent of phoenix companies at the time were being deregistered under the ASC’s s 574 program (the predecessor to s 601AB of the Corporations Act), ‘[e]ffectively … assisting Phoenix offenders to escape prosecution … and closing off the trail’”.[1]
The 2023 PJC Report into corporate insolvency has recommended (rec 10) that ASIC collect and analyse data from an appropriately sized sample of voluntary and compulsory de-registrations, to provide greater visibility of the solvency status of deregistered companies.
There is some background to this focus on deregistered companies.
Deregistered companies – a history
The opening words above come from a 2018 article by academic researchers, led by Professor Helen Anderson, who in 2014 obtained a Commonwealth research grant of $403,000 to examine the fraudulent use of phoenix activity. That research, over 4 years, resulted in a significant report – Phoenix Activity: Regulating Fraudulent Use of the Corporate Form (unimelb.edu.au) – the 2018 Phoenix Activity Report – comprising three papers on various aspects of phoenix activity – defining and profiling it, quantifying its incidence and cost, and its detection, disruption and enforcement. The ATO, ASIC and other agencies were consulted and involved in the research. Concerns were expressed and recommendations made about deregistered companies in the phoenix context.
Numerous further academic publications then followed, by Professor Anderson and others, offering more detail and other aspects of the issues, including in relation to employee entitlements, tax and funding.
In the 2018 article, after referring to the 1995 ASC report, the authors explained that in 2014–15:
- 7044 companies entered liquidation;
- this represented only 6.2 per cent of the 112 714 60 companies that were deregistered in that year;
- of the remaining companies, 42 059 were deregistered by ASIC under s 601AB of the Corporations Act
- of these, about 89.4 per cent, or 37 600 companies, are believed to have been deregistered by default under s 601AB(1)(1A);
- “many of these deregistered companies were likely abandoned, and a significant proportion of these companies could be Oldcos abandoned by illegal phoenix operators”. [p 277]
The concerns of the 1995 report were being repeated. The researchers did not go to the task of examining these companies, but available evidence supported the need to at least have some process of finding out. The risk is of “deregistration becoming the ‘black hole’ of directors’ misdeeds and unpaid debts, through phoenix activity or otherwise”: Anderson 2014.
In the midst of that research, it is noteworthy that in 2015 the government nevertheless accepted that the Insolvency Law Reform Act 2016 reforms would result in increased numbers of companies deregistered by default under s 610AB.[2] Reactive phoenix reforms followed, in 2020, under the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020.
The recommendations of the 2018 Phoenix Activity Report and later publications that some scrutiny be given to deregistered companies did not mean, as some have suggested, that each company should go through an external administration process, but rather that some higher level of scrutiny is needed. In 2023, AI or related processes may need to be applied.[3] We can contrast the extent to which the 7,000 or so companies entering a Ch 5 external administration process go through a high degree of scrutiny and reporting, often to little effect, while the 50,000 or so companies deregistered by default suffer no real examination of their affairs.[4] Some balance is required.
The 2023 PJC Report sought to address that balance by recommending that an appropriately sized sample of de-registrations be chosen for analysis.
Apart from concerns about phoenix or related conduct, and as Anderson and others say, many a deregistered company may be the result of a genuine failed business with creditors and unpaid employees where the directors do not have the funds to have the company liquidated. My explanation of the need for access to a winding up in those circumstances is referred to in the 2023 PJC Report.[5]
Recommendations in the 2018 Phoenix Activity Report and information and statistics on which they are based may need to be updated. It seems the authors had difficulty in extracting the numbers of deregistered companies from ASIC’s database, a difficulty which continues. Recommendations 4 and 5 of the 2023 PJC Report go the collection of and access to that and other data.
Australian Business Register and the Director Identity Number
Professor Anderson and her colleagues also made significant recommendations about the Australian Business Register and the Director Identity Number,[6] in particular that existing directors be required to disclose their previous deregistered companies. My resources don’t presently extend to finding whether that reform recommendation was applied and whether, in dealing with a company, one would be able to search the director’s corporate history via her or his director ID to assess their creditworthiness.
As one of Professor Anderson’s articles is titled – sunlight is a great disinfectant for phoenix activity,[7] indeed for commercial dealings generally.
A comprehensive review of insolvency law
My main point is to remind us that, the Commonwealth having funded high quality research for over $400,000, the many sound recommendations and ideas in that 2018 Phoenix Activity Report should be used in any comprehensive review of insolvency law, rather than, as may otherwise be the case, the wheel be re-invented.
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[1] Hedges, Jasper; Ramsay, Ian; Welsh, Michelle; Anderson, Helen — “The Potential Economic Gains from Increasing Public Law Enforcement against Illegal Phoenix Activity” [2018] MonashULawRw 8; (2018) 44(1) Monash University Law Review 267 (austlii.edu.au),
[2] Explanatory Memorandum to the Insolvency Law Reform Bill 2015.
[3] See ‘Rebuilding the structure of the Australian insolvency system’, Insolvency Law Bulletin (July 2022), Murray and Harris, referred to at p 179 of the PJC Report.
[4] Possible liabilities of directors are discussed in ‘The plight of the creditor of a deregistered company’, (2022) 39 C&SLJ 73, RI Barrett.
[5] [9.14]-[9.16].
[6] I and others credit Professor Anderson for the creation of the “DIN”: Anderson, H. “An ounce of prevention – Practical ways to hinder phoenix activity”. Australian Insolvency Journal, vol.25, no.3, 2013, pp. 16-18.
[7] Anderson, H. “Sunlight as the disinfectant for phoenix activity”. Company and Securities Law Journal, vol.34, no.4, 2016, pp. 254-275.
