On 23 August 2020, ASIC, as corporate regulator, announced that it is cracking down on businesses who are likely to engage in illegal phoenix activity. The onset of the Covid-19 pandemic has raised concerns that companies facing financial burdens may use the pandemic as a mask (or excuse) for engaging in phoenixing.
To this end, ASIC has drawn up a hit list of businesses where financial problems existed even before the pandemic hit.
What is illegal phoenix activity
Illegal phoenixing occurs when a new company is created to continue the business of a company which has been deliberately liquidated in order to avoid paying its debts, including employee entitlements, creditors and taxes. Illegal phoenix activity poses substantial risks to revenue and the integrity of the corporate system. You can read more about phoenix companies here.
The stricter measures
It is not just ASIC who has engaged in these crackdown measures.
The Australian Taxation Office (ATO) also operates a Phoenix Taskforce, comprising 38 federal, state and territory government agencies, including ASIC, the Attorney-General’s department and the Fair Work Ombudsman. Hence the Phoenix Taskforce adopts a whole-of-government approach to combatting illegal phoenix activity.
The ATO has developed sophisticated data-matching tools to identify, manage and monitor suspected illegal phoenix operators. Data from the ATO shows that the number of phoenix-related tip-offs to its Tax Integrity Centre has declined over the last six months, in the period from January 2020, despite an increase in the overall tip-offs reported to the Tax Integrity Centre. This may be as a result of the temporary Covid-19 relief package(s) negating the need for illegal phoenixing. ASIC’s data shows that the corporate regulator made five prosecutions and 11 director disqualifications for illegal phoenix activity in the 2019-2020 financial year.
Mr Warren Day, ASIC’s executive director for assessment and intelligence, stated that ASIC expects corporate insolvency and illegal phoenixing to increase as Covid-19 relief measures are wound back in the coming months. Both ASIC and the ATO are scrutinising such activity closely and advising corporate entities on the legitimate options available to them in the face of financial difficulties.
Getting the balance right
It is important for ASIC to strike the right balance between hampering illegal phoenix activity and affording companies the opportunity to engage in legitimate restructuring. Whilst ASIC don’t want to be seen as picking on organisations, particularly in the midst of a global pandemic, they also want companies to be doing the right thing.
Further reading and sources
ASIC launches new crackdown on “phoenix” companies, Ross D, The Australian Financial Review, 23 August 2020
You can read more about the ATO Phoenix Taskforce here.
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