The Australian Government has announced its plans to clamp down on ‘phoenixing’ by introducing a Director Identification Numbers (“DIN”) system. This announcement adopts one of the recommendations of the Productivity Commission’s Business Set-up, Transfer and Closure Final Report (PC Report) in the hope of stamping out phoenix directors.
So what exactly is a ‘Phoenix Director’?
‘Phoenixing’ is the process whereby directors transfer assets out of one company into another (often related) entity. They then declare the original company insolvent leaving a trail of unpaid employees and creditors, including the tax office. Then, much like the mythical phoenix, the same director will “rise from the ashes” to continue their business operations from another entity; carrying on as if nothing happened.
While the vast majority of directors operate their companies diligently and honestly, the recent increase in ‘phoenix’ companies costs the Australian economy an estimated $3.2 billion per year.
Will this mean Directors will be under more scrutiny?
One of ASIC’s biggest criticisms is its lack of power to more closely monitor and control directors. At the moment, becoming a director is easier than opening a bank account, leading to “dummy directors” holding positions they may not even be aware. The new DINs will require ALL directors to provide 100 points of identification.
In addition to a more stringent identification process, the director registration system will be able to track associated relationships, including related entities and family members. It’s anticipated this will close one of the loopholes that allow phoenix directors to rise from their ashes.
What about a Director’s privacy?
While most industry bodies support the new legislation, some concerns have been raised about privacy. As it is, a Director’s personal address is already publicly available through an ASIC search. There are renewed calls to remove addresses from public view, particularly given the new director profiles may contain sensitive information such as birth dates, license and passport details and tax files numbers.
How will these proposed changes stop these phoenix companies from occurring?
With the proposed changes Directors who have a history of failed or insolvent companies or are considered a “phoenixing” risk may be denied registration, or be required to pay a security deposit.
Other proposed changes include:
- making directors personally liable for GST liabilities
- granting more powers to the ATO to withhold tax returns and recover liabilities
- preventing Directors from backdating resignations to avoid personal liability
In addition to the changes directly affecting directors, a consultation process is underway to consider how the legislation could operate to interrupt liquidators and insolvency specialists who advise directors how to avoid their obligations. Some of the suggestions include a next-cab-off-the-rank system for appointing liquidators or prohibiting related entities from appointing a liquidator. It is anticipated that amendments targeting liquidators may also include personal and criminal liability penalty provisions.
How does this tie-in with the new ‘safe harbour laws’?
This announcement comes hot on the heels of the new ‘safe harbour’ laws. The new safe harbour laws allows directors to seek protection from personal liability:
“where they pursue a course of action that is ‘reasonably likely’ to result in a better outcome for the company than the immediate appointment of a liquidator.”
The safe harbour will be conditional upon meeting all employee entitlement and tax reporting obligations.
Directors in Australia have long argued that they are subject to some of the most stringent insolvency laws in the world, stifling innovation and growth. The Safe Harbour laws are a welcome relief, as are the Phoenix laws, but insolvency remains no less complicated for directors balancing the interests of their stakeholders, the growth of their company and their ongoing obligations under the Corporations Act.
The scrutiny of insolvent trading and monitoring Directors for improper action is a “hot” topic at the moment and one which Directors cannot ignore. For more advice on how to approach your Director obligations with certainty and confidence – call or email us today for a no-obligation chat.