Combating illegal phoenix activity
ASIC’s surveillance of illegal phoenix activity
Greg Tanzer, Commissioner
This article was submitted to the Governance Institute for publication in the Governance Directions magazine in October 2014
Readers of this magazine know ASIC has been cracking down on illegal phoenix activity.
And in August we widened our surveillance to look at use of false statutory declarations in Australia's building and construction sector.
This move follows feedback from small businesses, industry bodies and other government agencies about false statutory declarations in the sector to falsely claim payments for work.
We heard that there is widespread concern some officers of larger companies have falsely declared they have paid small businesses contracted to work on commercial and residential projects when this is not the case. This could be criminal fraud, or a breach of director duties.
Falsely declaring you've paid a contractor has serious flow-on effects in the building and construction industry. Many contractors are small operators who have expenses and debts to pay. When they are not paid for work done it puts their businesses, employees, livelihoods and creditors at risk.
ASIC's surveillance is also another important step in our work to combat illegal phoenix activity – the fraudulent act of transferring the assets of an indebted company into a new company to avoid paying creditors, tax or employee entitlements.
While false statutory declarations and fraud are matters for other regulators and enforcement agencies, company officers who knowingly make a false statement on payments to creditors may find themselves facing criminal or civil action by ASIC.
Under the Corporations Act, ASIC can also take administrative action against company officers who do this sort of thing.
More broadly, a 2012 PriceWaterhouseCoopers report estimated the economic cost of illegal phoenixing on the Australian economy was up to $3.2 billion. The same report highlighted that ASIC and the ATO regulate this activity.
Our wider phoenixing campaign looked at around 6,300 companies with hands-on surveillance of 203 corporates.
We also undertook extensive engagement with stakeholders including building and construction industry associations such as the Master Builders Association, Housing Industry Association, building super fund Cbus.
We also engaged with the Construction, Forestry, Mining and Energy Union, hosted a round table with 10 of Australia's largest commercial and housing construction companies; and presented to various state law societies, Australian Corporate Lawyers Association, Institute of Chartered Accountants of Australia and to the Australian Security Industry of Australia Limited.
Our crackdown found:
- The construction industry was overly represented by companies likely to engage in illegal phoenixing;
- Directors had limited knowledge and understanding about illegal phoenix activity;
- In a number of cases, alleged illegal phoenix activity had been uncovered and referred for internal enforcement action or to the ATO;
- There were fewer allegations of illegal phoenix activity among the failed companies ASIC looked at, compared with companies not involved in our surveillance.
And where we find illegal phoenixing, ASIC will take action. We have moved against the primary parties involved in illegal phoenixing - registered liquidators, directors, their advisers and accountants and in 2012/2013 disqualified 60 directors from managing companies.
Other ways ASIC is combating illegal phoenixing is via the Liquidator Assistance Program, which aims to ensure directors of companies in external administration provide information to the liquidator or ASIC about the companies they managed. Directors who fail in these obligations may be hit with ASIC court action.
In 2012/2013 financial year, ASIC received 1,484 requests for assistance from external administrators.
In the same year, 528 company officers were prosecuted for 966 offences with fines and costs of $1.1 million ordered. In addition, around 45% of requests for assistance were resolved by company officers providing the liquidator with the necessary information.
ASIC's illegal phoenixing campaign builds on our wider work to help small business owners protect themselves from unscrupulous operators. It also follows the release of our free smartphone app, ASIC Business Checks, which is a tool that helps business owners verify information about businesses they're dealing with or potential business partners. The app can be found at http://www.asic.gov.au/asic/asic.nsf/byheadline/ASIC+Business+Checks?openDocument
Greg Tanzer is a commissioner with the Australian Securities and Investments Commission
Note: the ASIC Business Checks app is no longer available. For more information on this topic, see our resources on protecting your small business.