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Focus: 'Phoenixing' reforms introduced

29 February 2012

In brief: The Federal Government has introduced draft laws directed at companies that engage in 'phoenix'-related activity, including imposing liabilities on the directors of those companies. Partner Simon Dewberry (view CV), Special Counsel Luke Gattuso (view CV) and Senior Associate Matthew McCarthy report.

How does it affect you?

  • The draft laws would impose liability on a company director for the company's debts when the director has also been a director of a failed company that traded under the same, or a similar, name.
  • The draft laws also provide for additional administrative powers to be granted to the Australian Securities and Investments Commission (ASIC) to order the winding up of a company when ASIC has reasonable grounds to believe that the company is no longer carrying on its business. This is likely to result in affected employees having greater access to the General Employee Entitlements and Redundancy Scheme.

The proposed legislation

In December 2011, the Federal Government released two pieces of draft legislation aimed at cracking down on company directors who engage in 'phoenix'-related activity. Phoenix activity arises when a company incurs debts to unsecured creditors (which may include its employees and the Australian Taxation Office, in addition to its ordinary trade creditors) and enters insolvency administration to avoid paying those debts, while the company's directors continue trading the business through a new company, often with the same employees, premises and customers, and the same, or a similar, name.

The draft legislation proposes the introduction of a range of measures intended to make 'phoenix' activity less attractive, while at the same time granting ASIC additional powers to address it.

Similar Names Bill

The draft Corporations Amendment (Similar Names) Bill 2012 proposes amendments to the Corporations Act 2001 (Cth) that would, in certain circumstances, impose liability on company directors for debts incurred by 'phoenix' companies. Under the Similar Names Bill, liability would be imposed on a director for debts incurred by a company (the debtor company) when that director was also the director of a 'failed company' that was known by the same or a similar name1 as the debtor company. Liability would extend to debts incurred within five years of the commencement of the winding up of the failed company.

Directors would not be liable when the failed company has paid all of its debts in full. They would also be able to avoid liability by obtaining an order from the court exempting them from liability, or an exemption from the liquidator of the failed company, if they can establish that they have acted honestly and, having regard to the circumstances, ought fairly to be exempt from liability for the debtor company's debts. There are a number of matters that the court, or the liquidator of the failed company, must take into account in determining whether to grant an exemption, including:

  • whether, at the time the failed company incurred debts, there were reasonable grounds for suspecting that it was insolvent;
  • the extent to which the assets, employees, premises and contact details of the failed company have become the assets, employees, premises and contact details of the debtor company; and
  • whether anything done, or omitted to be done, by the directors is likely to create the misleading impression that the failed company and the debtor company are the same entity.

There would also be an exemption for directors of a debtor company that was carrying on business in the 12-month period before the commencement of the winding up of the failed company. This would avoid liability being imposed on directors of a number of trading companies with similar names when one of those companies failed.

Phoenixing Bill

The draft Corporations Amendment (Phoenixing and Other Measures) Bill 2012 proposes further amendments to the Act that are directed at giving ASIC power to address phoenixing activity. The key measure in the Phoenixing and Other Measures Bill is the proposal that ASIC be given administrative power to order the winding up of a company when, among other reasons, it appears to ASIC that the company is no longer carrying on its business.

This measure has been proposed as part of the range of reforms in the Federal Government's Protecting Workers Entitlements package, which was announced before the federal election in 2010. Currently, while the Federal Government's General Employee Entitlements and Redundancy Scheme (GEERS) provides for the payment of certain unpaid employee entitlements to employees when the employer has been wound up, GEERS cannot be accessed when a company has been abandoned by its directors but not wound up. The proposed reforms would overcome this problem, by enabling employees to access GEERS when ASIC takes steps to order that a company be wound up.

The power to order the winding up of a company will also enable a liquidator to investigate the affairs of the company when there has been suspected phoenix activity or other misconduct.

Comment

It remains to be seen whether the reforms contained in the proposed legislation will, if enacted, lead to any meaningful reduction in phoenix activity. In particular, the measures proposed in the Similar Names Bill would not impose any liability on those directors who engage in such activity by using a business name that is not the same as, or similar to, the previous failed business.

The Similar Names Bill does not set out the degree of similarity required before a name is found to be so similar as to 'suggest an association with the failed company'. In the absence of further refinement of the proposed provisions, it will be left to the courts to determine that question, on a case-by-case basis.

The Federal Government has invited interested parties to comment on the draft Similar Names Bill by 29 February 2012. Comments have closed for the draft Phoenixing and Other Measures Bill. We will monitor the progress of the two Bills, and provide a further update once the legislation is enacted.

Footnotes
  1. Being a name so similar to the debtor company as to suggest an association with it. The Bill provides that 'name' includes a business name.

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