The Productivity Commission (PC) has issued its National Competition Policy: modelling proposed reforms. Among proposed inquiries into electric vehicle charging and marine freight is an inquiry into phoenix activity.
This is in the context of the government undertaking a two-year competition review. A key focus of the review is to ‘look at competition laws, policies and institutions to ensure they remain fit for purpose, with a focus on reforms that would increase productivity and more’ and assess their economic impact.
As to ‘where to begin’, the PC suggests monitoring the effects of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) ‘to identify what residual policy problems remain’. That Act introduced ‘creditor-defeating dispositions’ into the Corporations Act, s 588GAA-588GAC. These sections seek to hold company directors and officers accountable if they engage in illegal phoenix activity. Section 4(2) of the Amendment Act requires a review of the operation of the provisions to start as soon as practicable after the end of 5 years after the Act received Royal Assent, which was 5 February 2020, hence soon after 5 February 2025.
That will be an inquiry for Treasury to implement.
The PC says that phoenixing
“crowds out ‘legitimate’ businesses, preventing the market from operating efficiently by distorting price signals, increasing transaction costs, leading to ‘priced in’ risk, and undermining consumer confidence”.
The PC describes phoenixing as occurring when a new company continues the business of an existing company that has been liquidated or otherwise abandoned to avoid paying outstanding debts (which can include taxes, creditors and employee entitlements). Phoenixing is said to be most prominent in building and construction particularly in sub-industries that have large workforces of semi or unskilled labour, and where labour costs are a significant cost to business.
Phoenixing is anti-competitive as it undermines a level playing field for other businesses and the efficient functioning of the building market by distorting price signals and increasing transaction costs. It also imposes significant costs on government through unpaid tax liabilities.
There is said to have been numerous attempts to combat phoenixing.
“Regulators and watchdogs like the Phoenix Taskforce … provide a collective approach to monitoring and combating illegal phoenixing”.
The PC notes that further recent reforms have also introduced a requirement for directors to obtain a Director Identification Number (Director ID), which is said to act as an important mechanism for combatting illegal phoenixing.
Parliamentary Joint Committee
The PC refers to the fact that the Parliamentary Joint Committee on Corporations and Financial Services Report on Corporate Insolvency of July 2023 did not make recommendations to strengthen anti-phoenixing laws. The PJC has noted that additional time may be necessary to properly ascertain the effectiveness of the 2020 anti-phoenixing reforms.
However, the PC notes that the PJC was of the view that a further review, after an appropriate amount of time, may be necessary to determine whether additional administrative or enforcement mechanisms are needed to ensure the reforms are meeting their objectives: PJC Report p 217.
The PC notes that the PJC did, however, recommend the government commission a ‘comprehensive and independent’ review of Australia’s insolvency law, encompassing both corporate and personal insolvency. The government is yet to respond to that report.
Benefits of phoenix reform
In so far as any reforms may address phoenix misconduct, the PC sees the benefits of reform in reduced costs for creditors, including suppliers/contractors (fewer unpaid invoices); workers (reduced non-payment of wages, equivalent to an increase in wages); consumers (from incomplete work); government (increased tax collection – predominantly payroll, GST and company tax but also to a lesser extent personal income tax); better’ competition (in markets with large amounts of phoenixing); consumers, employees, suppliers and contractors through reduced undelivered entitlements.
In the construction industry, the principal effect would be to reduce the costs for those dealing with construction companies, including suppliers, contractors, workers and consumers and government through tax collection. A further effect of reducing phoenixing activity is to promote ‘better’ market competition, driven by increased consumer confidence and trust in price signals – that quoted prices are the actual price that will ensure delivery of the construction services.
Comment
The severe impact of unlawful phoenix activity on an economy no doubt exists, although more precise calculation of the direct or indirect economic benefits is difficult.
The PJC did in fact make a series of recommendations about the insolvency system, front of mind being to reassess its purposes, and its capacity to deliver in the legal and commercial environment in which it exists. To examine phoenix laws in advance of that may be premature. The capacity of insolvency law to regulate anti-phoenix laws is limited, and contestable, in so far as that is a public interest pursuit, another issue which the PJC recommended be examined.
The PC is fed an easy identifiable ‘problem’ which is due for legal review in any event. It seems to take the view that given the scope of these 2020 reforms, as well as the ongoing attention through the Phoenix Taskforce, “it is unclear what potential reforms remain in scope” – as if the introduction of legal sections into the Corporations Act were enough to address the issues.
Phoenix misconduct exists in an opaque commercial environment and can’t be assessed without the merits or otherwise of that environment being examined. Those in business have no free access to ASIC records, nor to director IDs, nor to any beneficial ownership register, nor to any trusts register; and are subject to the anti-competitive impacts of the tax system.
The reality is that a director may quite readily transfer assets from a failed company to a new company and leave the old to be deregistered by default. Creditors may have no financial incentive to object. The winding up of a company is left to the private market.
Even if the company is wound up, a liquidator may have no or limited funds to pursue any claim, let alone bring proceedings under ss 588GAA-588GAC. Also, given the evidentiary requirements of those sections, the costs of litigation proceedings may consume any recoveries made; although such data from the industry itself is not available.
Even if the liquidator does bring proceedings, the director may have a defence or be impecunious.
All these issues were pointed out many years ago in Phoenix Activity: Regulating Fraudulent Use of the Corporate Form, a major government funded research project.[1]
While a review of these provisions is in the future, its effect is not likely to be great, except in political terms that ‘something has been done’. There has in fact been no or limited action under the 588GAB, although it may well be that the mere existence of the section has served to provide some deterrent impact, conceivably.
So as to ‘where to begin’, far better to attend to the lax private business environment that gives each of the ATO, ASIC and ACCC so much regulatory and litigation tasks to pursue in the private sector, well beyond the problems of phoenix activity.
Note that a more thorough and reasoned and useful assessment than mine is provided by Trisha Hassan in Hassan, Trisha — “Insolvency and Illegal Phoenix Activity in the Construction Industry: an Analysis of the Current Measures in Place and Potential for Law Reform” [2022] UNSWLawJlStuS 16; (2022) UNSWLJ Student Series No 22-16.
Entrepreneurship, innovation, productivity, competition etc
Meanwhile, the PC is looking optimistically to see how we can
“foster entrepreneurship and innovation, a productive business environment and ongoing competition between businesses to lower prices, boost wages, and improve products and services, to achieve higher standards of living for all Australians”,
assuming that continual striving for growth is necessary and expected.
Its terms of reference will be available shortly.
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[1] ARC Discovery Project, 2014, $403,000, led by Professor Helen Anderson.
