The Phoenix Won’t Fly in the Construction Industry

Construction Industry

ASIC Sets its Sights on Clipping Wings in 15/16.

ASIC, the Commonwealth regulatory body charged with overseeing the conduct of Australian companies, has recently reconfirmed its intention to crack down on all phoenix activity, with a special focus on the building and construction industry over the 15/16 financial year.

Phoenix activity has been defined as “the deliberate and systematic liquidation of a corporate trading entity which occurs with the illegal or fraudulent intention to:

  • avoid tax and other liabilities, such as employee entitlements; and
  • continue the operation and profit taking of the business through another trading entity”.

It is, as its name suggests, the rebirthing of the same business out of the ashes of the old entity.

In simple form, phoenixing involves asset stripping out of an indebted company to avoid paying liabilities, such as employee wages and entitlements, superannuation, tax, or trading debts, while a new company is incorporated to carry on the business of the original company, with its assets now out of the reach of the original company’s creditors.

More sophisticated phoenix arrangements may involve a complex corporate group structure with multiple entities typically separating the group’s asset holdings from labour hire and other liabilities.

The economic cost of phoenixing is huge, with the overall cost to employees, business and government revenue running to the billions of dollars each year. Further, businesses which engage in phoenix activity are able to undercut their competition and gain an unfair advantage by avoiding legitimate liabilities which other companies have to pay.

Phoenix activity is not new; nor is the effort by ASIC to combat it. However, there are difficulties associated with this, as genuine business recovery and reconstruction can, on the surface, look very much like the more sinister phoenix.

The range of approaches available to the corporate regulators to combat phoenix activity includes the ATO’s director penalty regime, and ASIC’s ability to wind up abandoned companies and disqualify directors. ASIC has also successfully prosecuted professional advisers for aiding and abetting contraventions of statutory directors’ duties arising from phoenix activity.

Since 2013 ASIC has conducted surveillance on hundreds of companies with the aim of deterring phoenix activity. In this coming financial year, ASIC has confirmed it will be continuing this surveillance, looking at eight major building and construction projects, and paying particular attention to contractors who submit false statutory declarations to claim payments for unpaid contracted work. This practice can lead to serious flow-on effects and financial distress for companies in the sector.

All those involved in the building and construction industry should beware of phoenix operators and take care to ensure they are protected as far as possible through appropriate contractual terms and securities, and obtain proper legal advice as necessary.

For further information in relation to the above, please contact Craig Shepherd, Director or Anneliese Seymour, Senior Lawyer on (07) 4616 9898.

This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.

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