Insolvency practitioners call for crack down on phoenix companies, but it’s not so simple

The insolvency industry has warned more needs to be done to police the growing problem of phoenix companies and the practitioners who profit from setting up such dodgy deals, although at least one expert says the reality isn’t so simple.

While phoenix companies, in which directors place a company in liquidation in order to avoid paying tax and then continue to trade, do occur, one expert says they’re still not defined at all.

Cliff Sanderson of Dissolve told SmartCompany there are still “no phoenix company laws”.

“There was some legislation last year which made directors potentially liable for PAYG and tax returns, but there’s nothing specifically there about phoenix operations.”

The matter has been put under the spotlight after Robyn Erskine, head of the Insolvency Practitioners Association of Australia, told the Australian Securities and Investment Commission’s annual forum yesterday phoenix operations need more regulation.

She claimed the practice is costing the country more than $3 billion a year.

“What we need to stop is the director who sets out with the intention of incurring debt and not paying for it,” she said.

“More importantly, we need to stop the advisers who are making a living setting up these unlawful phoenix structures.”

The Australian reported Bruce Collins, assistant deputy commissioner for SMEs in the Australian Taxation Office, said the ATO and the Australian Securities and Investments Commission could “do more” to help share information and fight phoenix operations.

But Sanderson says there needs to be more work done in the legislative field rather than simply policing phoenix operations which operate under vague terminology.

Part of the problem is the Fair Work Ombudsman defines a phoenix company as the transfer of any corporate entity to a new entity.

“There is no law at ASIC or at the Australian Tax Office they can rely on for phoenix operations, but the concept is simple: we don’t want directors setting up new companies which spring from the ashes of an old one.”

But these issues can become complicated, Sanderson argues: What happens if someone pays full value for the assets of an old company?

“If a company has assets of $300,000 and someone buys that company and starts again, that transaction isn’t prevented.”

“But if the new company had paid $100,000, or in other words, undervalue, that’s common among phoenix companies.”

Sanderson argues the trouble is deciding at what point you something is a phoenix operation.

“At the moment, it’s really difficult to figure out at what point that occurs.”

“There are other points, like if a director has breached other laws, such as trading while insolvent, that area can be targeted.”

Sanderson notes ASIC is going after directors who have operated several insolvent companies more aggressively than it has done previously.

“We’re not a mile away from the reality of policing phoenix companies, it’s just a matter of using current laws.”

“We have to outline specifically what we want to outlaw, and figure out if there are bullets that don’t get used as often as they should.”

A recent report from Fair Work revealed phoenix activity costs the economy between $1.78 billion and $3.19 billion every year.

The IPA, ATO and ASIC were invited to comment, but no reply was available prior to publication.