Corporate Law for Phoenix Activity in Australia- myassignmenthelp

Question: Discuss about theCorporate Law for Phoenix Activity in Australia. Answer: Phoenix refers to the mythical creature which is reborn from the ashes of its own old body upon death. Going by the analogy, phoenix activity describes such a new business which is reborn from the ashes of its defunct business. This contains a range of different activities and practices; though, it mostly contains a director cycle production business assets from different companies where a deliberate attempt is made towards avoidance of liabilities from the trade creditors and tax (Margret and Peck, 2014). The ASIC, i.e., the Australian Securities and Investment Commission has described phoenix activity as such conduct which meets a particular set criteria. When an entity fails to pay its debts; acts in a way where the unsecured creditors are intentionally denied equal access to the assets of the entity for meeting its outstanding debts; and in a period of one year, a different business is initiated where some or all of the assets of the previous business and the same is controlled by the parties which are related to the directors or management of the previous entity (Taylor David, 2014). Phoenix activities are not beneficial for the society. This is because it is such an activity, whereby for the benefit of a few, a huge group of people, including different stakeholders are impacted. This is particularly true because such activities are undertaken for fraudulent purpose, where the theme is to be benefited by indulging in activities which harm different people. Society contains the employees and creditors which are majorly harmed as their debts and rightful earnings are never paid in such cases. Further, by costing the nation millions of dollars, the economy is affected, the impact of which is ultimately born by the society. The purpose of indulging in phoenix activities stems from the fact that it is too easy and lucrative, along with being cheap and largely invisible. By using phoenix activities, the directors or the management of the old company are able to evade their liabilities and continue the business merely by forming a new company, whilst making use of the assets of the old company (Oakes and Clark, 2017). There can always be more than one purpose of indulging in such activities which includes accumulation of debts without having the intention of repaying these debts and even liquidating for the purpose of avoiding the debt repayment. Through the adoption of phoenix activities, the individuals involved in such activities are also able to obtain tax benefits (Australian Government, 2009). By indulging in phoenix activity, a certain segment of individuals are able to benefit, but the majority looses from such activities. The benefit in case of phoenix activities is to the management and directors of the old company, who form the new company, by using the assets of the old company. This is because they are able to use the assets of the old company in their new company, which saves costs which would have to incur otherwise. Secondly, they are able to evade their liabilities which were born due to the debts of the old company, towards the creditors, tax department and the different stakeholder groups. The people who have to bear loss or who are affected by such phoenix activities in a negated manner are higher, than the ones who benefit from it. The Productivity Commission report of 2015 showed that there were around two thousand to six thousand phoenix companies in the nation, which was costing the nation around A$1.8 billion to A$3.2 billion per annum (Productivity Commission, 2015). Based on the Senate Economics References Committee, illegal phoenix activity was a problem for the countrys economy and a major culture of disregarding the law was being followed (The Conversation, 2016). The tax revenues are also affected in a detrimental manner due to major unpaid tax liabilities (Anderson, Ramsay and Welsh, 2016). Apart from the economy of the nation, there are different stakeholders who are negatively affected by such activities. And it can be fairly stated that the illegal phoenix activities have unfair and far reaching consequences. The employees are included in the stakeholder group affected by such illegal phoenix activities. This is because the employees not only lose their wages/ salary but also lose all their entitlements, which they had rightfully earned. The next stakeholder group which is affected by such activities are the creditors, the majority of whom are small businesses, as they are left with their debts being unpaid. The contractors who had contracted with the old company are also affected as the promise made under the contract remains unfulfilled. Hence, the fraudulent phoenix activities adversely affect the creditors, employees, contractors and the public revenue (Anderson et al, 2017a). Even though phoenix activities have been covered under parliamentary inquires, reports and papers, the term phoenix activity has not been specifically defined under the Corporations Act. The Corporations Act, 2001 (Cth) had been recently amended by the Phoenixing Act for giving the discretionary power to the ASIC for winding up a company which has been abandoned if certain circumstances are established. These situations have been covered under section 489 EA of the Corporations Act (WIPO, 2015). The Regulatory Guide 242 has been issued by ASIC which broadly explains the circumstances in which the power could be exercised under Corporation Acts Part 5.4C. In case a company is ordered to be wound up pursuant to section 489 EA, a liquidator has to be appointed for winding up the company affairs and for distributing the companys property (Boss Lawyers, 2017). Even though the corporate law regime of the nation does not define or penalize fraudulent phoenix activities, the directors who are involved in such activities can be made liable. So, a director could be held in breach of different duties like the duty of good faith, use of information or position, and duty of not incurring debts when the company is insolvent (Cassidy, 2006). Such activities could also contain voidable transactions or could lead to breach of provisions covered under Part 5.8A of the Corporations Act, 2001 (Cth), which are aimed at protecting the entitlements of the employees (Martin, 2007). Under section 181 of the Corporations Act, 2001, it is the duty of directors of the company to use their powers and undergo their obligations in a manner which depicts good faith, is for proper purpose and in companys best interest (ICNL, 2017). Section 182 and 183 impose duty for use of position and information of the company, respectively (Federal Register of Legislation, 2017). When the directors indulge in such activities, they do not work in the best interest of the old company and they use the information and position of the old company, for the benefit of the old company. Further, the best interest of the old company is also not kept as the assets of this old company are used to benefit the new company (Martin, 2007). Owing to these actions of the directors, they can be disqualified pursuant to section 206D of this act and can be disqualified from being the director of any company, for a period decided by the court (Latimer, 2012). The director duties are also breached for indulging in insolvent trading pursuant to section 588G (Australasian Legal Information Institute, 2017). This is because the phoenix activities are used when the company nears insolvency or is already insolent and the directors allow the company to continue incurring debts to the creditors, owing to the intention of winding up the company before making the repayment. This gives the creditors the option of making action against the rouge directors (Martin, 2007). ASIC v Somerville Ors [2009] NSWSC 934 was one of the cases where the disqualification order was successfully attained by the ASIC against the legal advisor of the company due to presence of phoenix activity. The defendant was the solicitor who incorporated the legal practice which was advised by the directors of the company who were facing financial difficulties. The reason for holding the defendant liable was due to the fact that he gave the advice to restructure the company even when he was aware of the formation of new company when the trade of the old company had not been ceased (Mullette, 2009). Due to these reasons, a disqualification order of six years was passed against the defendant (Anderson et al, 2017a). In July 2015, the ASIC endorsed different provisions in its Productivity Inquiry as supplementary submission into the setting up, transfers and closure of businesses. This was due to the fact that section 596AB which was meant to stop people from indulging in such activities had limited effectiveness. And also that bringing actions against the directors could prove to be a costly affair. And with this the phoenix prohibitions were introduced (Anderson et al, 2017b). The phoenix prohibitions do not capture the sophisticated phoenix arrangements where the transfer of assets is not included. Though, the position of the ASIC, regarding the creation of the phoenix prohibition does not seem to be consistent in its entirety. It had been identified in the productivity commission report that the director duties are under utilized in the phoenix context and the same is the story of insolvent trading provisions. Even though insolvent trading attracts civil penalties, section 596AB, containing criminal provisions, could only be enforced by the ASIC (Paolini, 2014). So, the criminal conviction can be more difficult than enforcement of the civil provisions. This is due to the fact that for criminal conviction, there is a need to establish elements of mens rea, along with giving such proof which established the claim beyond reasonable doubts (Anderson et al, 2017b). So, the question here is, are the phoenix prohibitions really the solution? The notion of specific phoenix prohibitions is quite appealing. This is because such prohibitions send educative message to the controllers and advisors of the company and even has the potential of increasing the commitment towards compliance. This is due to three distinctive factors, i.e., normative, social and calculative. The first category of people is internally motivated to comply owing to their moral reasoning. So, when phoenix prohibitions are introduced, such people would follow it as they cannot be immoral or do something which is undesirable. Such individuals who are motivated owing to the social factors would have the need of being respected and approved by their peers. So, they would want to avoid reputational damages and negative publicity which could take place from the contravention of these prohibitions. And the ones who are motivated through calculative factors would always take into conside ration the costs of compliance and the chances of a wrong done being detected (Anderson et al, 2017b). And yet, there is not much conviction in these prohibitions and the arguments in favor of these prohibitions are not very convincing. There would be clear difficulty in drafting a legislative provision which is more specific in comparison to the present director duties which could properly cover the different and complex manifestations under such activities. In case such a provision is proposed which deals with externally discernible facts risks, would become very complex, and would be full of loopholes. So, the need is to penalize the wrongdoing, instead of penalizing the situation in which the same took place (Anderson et al, 2017b). The need here is not to bring out additional complexity to the laws which govern the unlawful phoenix activities at the present, and instead, the need is to strengthen the profit stripping and compensation remedies, in addition to the imposition of punitive penalties which are present for the contravention of the director duties. Through adoption of such proposal, the dual function would be served as the ASIC would be incentivized and the private litigants would be using the breach provisions more often due to the chance of gaining more from the enforcement actions; and it would also deter the illegal phoenix operators owing to the fact that they would lose a higher amount being engaged in phoenix activity (Anderson et al, 2017b). There is a need to adopt an alternative to the phoenix prohibitions. This is to improve upon the current provisions, instead of bringing out an additional burden. There is a need to seek sanctions for the breach of director duties. There is a need to introduce major penalties, along with the need to couple the losses born from such activities and the financial gain attained to be used to compensate the ones who had to bear such losses, and also increasing the costs of non-compliance for the directors. Though, this requires and effective enforcement mechanism particularly with regards to the director duties. There is also a need to enhance the frequency of enforcement actions by the ASIC. And this is where the law needs to be amended so as to send a key message to the enforcers and the miscreants (Anderson et al, 2017b). As highlighted in the previous segment, there is a need to bring out changes in the current law by imposing higher penalties. In this regard, there is also a need for structuring of the phoenix prohibitions or offences in a manner, so as to include such penalties. There is a need to include the provisions of Crimes Act 1900 (NSW) into the phoenix prohibitions and to oversee that these are strictly applied. In this regard, three sections are prominent: Section 192F which deals with the intention to defraud by destruction or concealment of accounting records; Section 192G which deals with the intention to defraud by using or making false or misleading statement; and Section 192H which deals with the intention to deceive the creditors or the members by using or making false or misleading statement of officer of the organization (NSW Legislation, 2017). There is an immediate need of expanding the reach of compensation orders which are awarded by the court under section 1317H. This has to be done in a manner so that the compensation orders include accounts of profits orders and possibly a compensation of these two. So, the court could order the liable person to compensate for the damages suffered, along with a civil penalty and could also include the profits made by indulging in phoenix activities. The liable party also needs to include the controlled beneficiary person and the involved beneficiary person. And the damages to cover the diminution of the property and the profits made (Anderson et al, 2017b). Apart from this, there is a need to increase the relevant criminal, as well as, civil penalties. Under the present laws, the maximum pecuniary penalty which can be awarded for breaching the director duties is $200,000. However, there is a need to understand that these penalties were drawn back in 1993; and with the inflation, there is a need to adjust these. There is a need to raise this limit so as to actually be significant enough so that the imposition of it greatly affects the offenders. Similarly, the present criminal penalty units for this breach also need to be brought up. There is a need to structure all these properly in the phoenix prohibition for it to be successful (Anderson et al, 2017b). References Anderson, H., Ramsay, I., and Welsh, M. (2016) Illegal phoenix activity: Quantifying its incidence and cost. [Online] Melbourne Law School. Available from: https://law.unimelb.edu.au/__data/assets/pdf_file/0003/2070363/Anderson,-H,-Ramsay,-I,-and-Welsh,-M,-Illegal-Phoenix-Activity-Quantifying-Its-Incidence-and-Cost-2016-24-Insolv-LJ-95.pdf [Accessed on: 23/08/17] Anderson, H., Ramsay, I., Welsh, M., and Hedges, J. (2017a) Phoenix Activity. [Online] Melbourne Law School. Available from: https://law.unimelb.edu.au/__data/assets/pdf_file/0020/2274131/Phoenix-Activity-Recommendations-on-Detection-Disruption-and-Enforcement.pdf [Accessed on: 23/08/17] Anderson, H., Ramsay, I., Welsh, M., and Hedges, J. (2017b) Illegal Phoenix Activity: Is A Phoenix Prohibition The Solution?. [Online] Griffith University. 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Available from: https://theconversation.com/illegal-phoenix-activity-is-costing-us-billions-heres-how-it-could-be-stemmed-65335 [Accessed on: 23/08/17] WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 20/08/17]