Pitcher Partners backs Government’s phoenix reform plan

By admin - November 21, 2017

Pitcher Partners has welcomed sweeping reforms proposed by the Australian Government to identify and target illegal phoenix operators, the activities of which cost the nation’s economy up to $3.2 billion every year.

Phoenix activity, which is not currently defined at law, generally involves the transfer of assets between related companies to intentionally avoid paying creditors. It allows a business to carry on through a new entity, while leaving all or most of the debt behind in the old entity.

With a number of recent, high-profile insolvency appointments, the Pitcher Partners’ Business Recovery and Insolvency division is at the frontline in tackling illegal phoenix activity.

Gess Rambaldi, partner in charge of the Pitcher Partners Melbourne Business Recovery and Insolvency Services (BRIS) and Chairman of Pitcher Partners’ National BRIS, welcomed the proposed reforms.

“Illegal phoenix activity hurts the middle market where most of our clients operate. These reforms are long overdue,” he said.

The proposed reforms include the creation of a specific phoenix offence, the introduction of a phoenix whistle-blower hotline, and the identification and classification of High Risk Phoenix Operators (HRPOs).

They would also limit the ability of related parties to unduly influence the liquidation process, introduce restrictions to prevent directors abandoning ‘zombie’ companies, and limit a director’s ability to backdate their resignations from company boards.

The Government is proposing to amend the Corporations Act 2001 to more readily identify illegal activity and to give liquidators and creditors powerful tools to challenge phoenix transactions and prosecute wrongdoers.

Mr Rambaldi has identified several key ways in which illegal phoenix activity hurts the middle market, including creating an unfair advantage for phoenix businesses. He said he was aware of phoenix business models in which companies were formed with the specific intention of never paying their debts and in which their assets would be transferred at some future point to a new ‘clean' entity.

“A business that doesn’t pay its debts will have more cash to underquote competitors, expand operations and ultimately increase market share,” Mr Rambaldi said.

“It is difficult for those businesses doing the right thing to compete with those funding their activities through phoenix activities.”

Phoenixing also affected the cash flow of middle market suppliers, with implications across sectors.

“An illegal phoenix transaction will leave a trail of unpaid suppliers in its wake, who will be financially disadvantaged. In the worst-case scenarios, these disadvantaged businesses may end up insolvent as a result,” he said.

In response to the proposed reforms, the National Pitcher Partners BRIS has given the Government taskforce a detailed submission addressing each of the Government’s targeted areas of interest.

Mr Rambaldi said Pitcher Partners supported the introduction of a specific phoenix offence and the strengthening of a liquidator’s ability to challenge phoenix transactions.

In particular, these provisions would be effective if it was deemed that a transaction was intended to defeat creditors if the transferor was, or was about to become, insolvent at the time of the transfer.

But he warned that a hotline could prove to be ineffective if the operator was not sufficiently resourced and trained to record, investigate and deal with referrals.

“A consistent problem in this area has been a failure to give the Australian Securities and Investments Commission sufficient resources to investigate and prosecute offenders,” Mr Rambaldi said.

The Government’s proposal to limit the backdating of director appointments and resignations would be an effective reform, as backdating is one of the common tools used to facilitate illegal phoenix activity, according to Mr Rambaldi.

“It is long overdue” he said.  

Pitcher Partners supported the introduction of a ‘rebuttable presumption’ in these circumstances.

This would provide that a director was presumed to continue to have acted as a director throughout the period prior to the lodgement of the formal resignation.

“If a director resigns their position, it should be incumbent on them to ensure that ASIC is updated a timely way," he said.

"A failure to do so will mean that you are presumed to have been director prior to ASIC’s records being properly updated.”

This presumption would allow ASIC and a liquidator to hold a director to account for all of a director's duties throughout this period, including misconduct.

"Illegal phoenix activity is a significant drain on our economy," Mr Rambaldi said.

"There is no easy fix. The solution is a combination of law reform, a better resourced and more proactive regulator, and a fundamental shift in our business culture which recognises the illegality of this type of behaviour."

Click here to read Pitcher Partners’ full response document.

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