phoenix – ░░░ INSOLVENCY INTERFACE

Contempt for corporations law a growing culture in construction industry

ASIC, Australian Senate 2013-14, Corporate Insolvency, Insolvency Statistics, Phoenix company activity, White collar crime Comments Off

Dec 042015

The Senate Economics References Committee has criticised the contempt that some directors show for company laws, the “mild” consequences of non-compliance and the low likelihood that unlawful conduct will be detected.

In its report “Insolvency in the Australian construction industry: I just want to be paid” – published 3 December 2015 – the Senate Committee states:

The committee considers that the estimates of the incidence of illegal phoenix activity detailed in this report suggest that construction industry is being beset by a growing culture among some company directors of disregard for the corporations law. This view is reinforced by the anecdotal evidence received by the committee which indicates that phoenixing is considered by some in the industry as merely the way business is done in order to make a profit.

The committee is particularly concerned at evidence that a culture has developed in sections of the industry in which some company directors consider compliance with the corporations law to be optional, because the consequences of non-compliance are so mild and the likelihood that unlawful conduct will be detected is so low.

This culture is reflected in the number of external administrator reports indicating possible breaches of civil and criminal misconduct by company directors in the construction industry. Over three thousand possible cases of civil misconduct and nearly 250 possible criminal offences under the Corporations Act 2001 were reported in a single year in the construction industry. This is a matter for serious concern. It suggests an industry in which company directors’ contempt for the rule of law is becoming all too common.

[from Executive summary, Phoenixing (page xix) and paragraph 5.100 (page 87)]
Continue reading »

More talk about phoenixing of insolvent companies

Corporate Insolvency, Employee Entitlements, External administration, External administrators, Personal Bankruptcy, Phoenix company activity, Practitioners Association (ARITA), White collar crime Comments Off

Nov 122015

Transcripts have now been published for all of the public hearings of the Senate inquiry into insolvencies in construction industry. Phoenixing of companies is the main topic discussed. Several insolvency practitioners have given evidence, and at the hearing in Sydney on 28th September the insolvency profession was criticised by the leading participant, Senator Doug Cameron. At the public hearing in Melbourne on 29th September the Walton Constructions case was discussed in detail by the insolvency practitioners initially appointed as external administrators.

A list of the public hearings and those who appeared as witnesses is provided below. Continue reading »

Targeting phoenix activity: union asks Senate for tougher laws and action

ASIC, Australian Senate 2013-14, Corporate Insolvency, Employee Entitlements, Official Inquiries, Phoenix company activity, Regulation, White collar crime Comments Off

Oct 252013

The Australian Manufacturing Workers’ Union (AMWU) has focused its recent submission to the inquiry by the Australian Senate into “The performance of the Australian Securities and Investments Commission” on the issue of phoenix company activity.

The AMWU claims that “ASIC’s failure to adequately hold directors to account has cost millions of dollars worth of unpaid entitlements for employees nationwide. The time is now for action to be taken, impunity to end, and for unscrupulous directors to be held accountable.”

The AMWU submission (21 October 2013) makes four recommendations, namely:

1) Increasing resources and funding to ASIC so that it can properly investigate corporate misbehaviour.

2) A comprehensive review and amendment of s 596AB of the Corporations Act to provide stronger safeguards for employee entitlements and allow for more successful actions by ASIC and liquidators.

3) Introducing a reverse onus procedure by which a director, where there has been an adverse liquidators’ report lodged against them, will be required to ensure that they have acted honestly and responsibly in relation to company affairs.

4) Increasing ASIC’s legislative powers to hold directors and officers personally responsible for unpaid employee entitlements, with a particular focus on phoenix activity.

In expanding on and explaining these recommendations the AMWU says:

1) “ASIC is under-resourced to handle the thousands of complaints submitted to it every year. Regardless of what legislative or regulatory reforms are undertaken, without additionally funding, ASIC will not be able to protect the interests of even the most vulnerable of parties, such as employees. There needs to be a commitment to replace impunity with accountability, and increased resources and funding to ASIC must be the driving force behind this.”

2) “The intention behind s 596AB was to “deter the misuse of company structures … to avoid the payment of amounts to employees that they are entitled to prove for on liquidation of their employer”. This intention has not materialised. Instead, the criticism that s 596AB will prove to be a “toothless tiger… so hard to prove that nobody will be effectively prosecuted” has been proven true. This recommendation would allow for ASIC to, more easily, bring proceedings against directors who have compromised employee entitlements through corporate restructures. This would have a threefold effect of protecting employee entitlements, holding dishonest directors to account, and deterring similar conduct.”

3) “This recommendation is modelled upon Irish legislation under the Companies Act 1990 (Ireland) s 149. In Ireland, where an adverse liquidators’ report has been lodged, directors must ensure that a large amount of equity capital is invested in the new company (at least £100 000 with a minimum of £20 000 paid up in cash) or are required to prove in court why they should not be required to do so. This reverse onus procedure would reduce the detection and compliance burden on ASIC.”

4) “The AMWU submits that continued review of the anti-phoenix activity measures implemented be undertaken, especially in light of the first anniversary of the enactment of the Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth).”

In support of its submission the AMWU gives its summary of the following recent cases:

• Steel Tube Pipe Group
• Forgecast Australia Pty Ltd (AMWU v Beynon [2013] FCA 390)
• Carlton Sheet Metal Pty Ltd
• Huon Corporation
• Paragon Printing Ltd

The inquiry by the Senate Standing Committee on Economics began on 20 June 2013. Submissions were to close on 21 October 2013. The Committee is due to report by 31 March 2014.

Questions concerning new power for winding up by ASIC

ASIC, Corporate Insolvency, Insolvency Laws, Insolvency practices, Regulation Comments Off

Feb 272012

New laws have been drafted to give the Australian Securities and Investments Commission (ASIC) power to wind up companies. But what mode of winding up will these liquidations be? Creditors’ voluntary liquidation, or failed members’ voluntary liquidation? And will there be any requirement that directors prepare a statement of assets and liabilities?

The focus in this post is on a proposed new section of the Corporations Act 2001, namely section 489EB — “Deemed resolution that company be wound up voluntarily”.

The section seems, at the beginning, to be proposing that the winding up proceed as a creditors’ voluntary winding up. Subsections 489EB(a) and (b) state:

“(a) the company is taken to have passed a special resolution under section 491 that the company be wound up voluntarily; and

(b) the company is taken to have passed the special resolution:

(i) at the time when ASIC made the order under section 489EA; and

(ii) without a declaration having been made and lodged under section 494; ”

In other words, it is deemed to be a creditors’ voluntary liquidation because the deemed resolution to wind up the company is deemed to have not been accompanied by a declaration of solvency under section 494.

But then in subsection 489EB(c) reference is made to section 496: a section that only applies where a declaration of solvency has been made under section 494.

Section 496 – Duty of liquidator where company turns out to be insolvent – applies in a members’ voluntary liquidation. But how could section 496 have any application?

To me the reference to section 496 seems to be in direct conflict with (proposed) subsections 489EB(a) and (b).

If section 496 does somehow have some application as (proposed) section 489EB(c) seems to suggest, then it would appear that the winding up by the ASIC is to be a members’ voluntary winding up where a company turns out to be insolvent.

If section 496 (for members’ voluntary liquidations) does apply, then section 496(2) – notice to creditors, section 496(4) – liquidator to lay before meeting a statement of assets and liabilities, and section 496(5) – replacement of liquidator, and the other subsections in 496, would be brought into play, wouldn’t they? Is this intentional or are these oversights or unintended consequences?

If section 496 is to have some application in a winding up by the ASIC, does that mean that the liquidator may choose a path other than the winding up of the company? I ask this because section 496(1) gives the liquidator the option to apply under section 459P for the company to be wound up in insolvency, or appoint an administrator of the company under section 436B, or convene a meeting of the company’s creditors? Is this intentional or are these oversights or unintended consequences?

If the winding up is a creditors’ voluntary winding up, then it appears that — unlike in an ordinary creditor’ voluntary winding up — there will be no requirement of directors to submit a Report as to Affairs (RATA). This is so because the section that does require a RATA from the directors — section 497(5) — seems, along with all other parts of section 497, to have been made inapplicable by the following words of (proposed) subsection 489EB(d), “section 497 is taken to have been complied with in relation to the winding up”.

The same would be true of section 497(2)(b)(i), which requires the liquidator to send creditors a summary of affairs (Form 509). It too would be “taken to have been complied with in relation to the winding up”.

Which suggests that when a company is wound up by the ASIC there will be no requirement on the part of directors to prepare and submit a statement about the company’s business, property, affairs and financial circumstances.

This seems strange given that in the other two types of insolvent winding up – court-ordered winding up and creditors’ voluntary winding up– such a statement is required. Is this an oversight or an unintended consequence?

Also, the removal of a duty to do a RATA would be extraordinary when liquidators say – as made clear in my recent IPA sponsored survey of official liquidators – that a RATA from directors is a very valuable tool for the efficient conduct of a winding up.

This is all that the official Explanatory Memorandum says about proposed section 489EB:

“If ASIC exercises its powers to wind up a company under the new law, the company is deemed to have passed a special resolution under existing section 491 of the Corporations Act that the company be wound up voluntarily. The resolution is deemed to have been made on the day that ASIC uses its administrative power to order the winding up and does not require a declaration of solvency to have been made under existing section 494 of the Corporations Act. A meeting of creditors under existing subsection 497(1) of the Corporations Act is not required where the winding up has been ordered by ASIC. “

The peculiar phrase “The resolution … does not require a declaration of solvency to have been made under existing section 494” suggest to me a lack of understanding of the law.

And the reference to subsection 497(1) is odd given that the proposed law refers to section 497 as a whole, not just subsection 497(1). Has there been a mistake in drafting subsection 489EB(d)? Should it refer more narrowly to subsection 497(1) rather than to the whole section?

Draft laws released on director liability for unpaid super

Employee Entitlements, Insolvency Laws, Insolvency practices, Priority Debts, Taxation Issues, White collar crime Comments Off

Jul 142011

Draft Australian tax laws intended “to better protect workers’ entitlements to superannuation, strengthen director obligations and enhance deterrence of fraudulent phoenix activity” were released on 5 July 2011 for public consultation. Treasury states that:

” The main aspects of these amendments involve:

extending the director penalty regime beyond its current application to Pay As You Go (PAYG) withholding to make directors personally liable for their company’s unpaid superannuation guarantee amounts;
allowing the Commissioner of Taxation (the Commissioner) to immediately commence recovery of all director penalties when the company’s unpaid liability remains unpaid and unreported three months after the due day, regardless of the character of the company’s underlying liability; and
providing the Commissioner with the discretion to prevent directors and, in some instances their associates, from obtaining PAYG withholding credits where the company has failed to pay amounts withheld to the Commissioner.”

To see the Explanatory Memorandum and/or the Exposure Draft Legislation CLICK HERE.

Closing date for submissions: Monday, 1 August 2011

I intend to write more about this soon.

Budget 2011: Tax Office director penalty notices (DPN) extended and tightened

Insolvency practices, Tax debts, Taxation Issues, White collar crime Comments Off

May 112011

Under the heading “countering fraudulent phoenix activities by company directors”, the Australian Government has announced in the Budget that with effect from 1 July 2011:

the director penalty regime will be extended to superannuation guarantee amounts, making directors personally liable for their company’s failure to pay employee superannuation;
the Australian Taxation Office (ATO) will be given the power to commence recovery against directors under the director penalty regime, without providing a 21 day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due; and
in certain circumstances directors and associates of directors will be prevented from obtaining credits for withheld amounts in their individual tax returns where the company has failed to pay withheld amounts to the ATO.

The Budget paper describes fraudulent phoenix activity as:

“… which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt. The business is then continued as another corporate entity, controlled by the same person or group and free of their previous debts and liabilities.”

This measure is estimated to result in an additional $260 million in revenue in fiscal balance terms over the forward estimates period. There is a related increase in ATO departmental expenses of $22.1 million over the same period. In underlying cash terms, the estimated increase in receipts is $245 million over the forward estimates period.

See http://www.budget.gov.au/2011-12/content/bp2/html/bp2_revenue-07.htm

” The main aspects of these amendments involve:

extending the director penalty regime beyond its current application to Pay As You Go (PAYG) withholding to make directors personally liable for their company’s unpaid superannuation guarantee amounts;

allowing the Commissioner of Taxation (the Commissioner) to immediately commence recovery of all director penalties when the company’s unpaid liability remains unpaid and unreported three months after the due day, regardless of the character of the company’s underlying liability; and

providing the Commissioner with the discretion to prevent directors and, in some instances their associates, from obtaining PAYG withholding credits where the company has failed to pay amounts withheld to the Commissioner.”