ASIC launches new crackdown on ‘phoenix’ companies

ASIC is drawing up a hit list of businesses it believes are likely to illegally ‘phoenix’, as well as the advisers helping them.

Data from the Australian Tax Office shows 1506 phoenix related tip-offs to its Tax Integrity centre since January.

The corporate regulator is drawing up a hit list of businesses it believes are likely to illegally ‘phoenix’ and advisers helping them ahead of the end of insolvency protection measures.

Warren Day, the Australian Securities and Investments Commission’s executive director for assessment and intelligence said the regulator is targeting businesses “that look like they had problems before March” and are using the cover of the coronavirus pandemic to hide their actions.

The so-called ‘phoenixing’ of companies sees assets of a financially stressed company transferred to a new entity prior to entering administration, often allowing the original company to continue to trade and preventing creditors of the original collapsed company recovering money they are owed.

“We don’t want to be in a position where we are picking on businesses in a difficult environment, what we do want to do is focus on people who are not going to follow the rules,” Mr Day told The Australian.

“If a business was struggling and doing preparatory things or things that might amount to illegal phoenix activity and then they put them on hold because of the moratorium and support measures we will still focus on those businesses.

“What we will be keenly looking for is to see what happens with those businesses as those support mechanisms roll off.”

Data from the Australian Tax Office shows 1506 phoenix related tip-offs to its Tax Integrity centre since January, below the almost 1800 tip-offs in the six months leading up to January.

The number of new ‘phoenix’-related tip-offs declined over the last six months despite overall tip-offs to the Tax Integrity Centre growing.

Insolvencies are currently tracking at almost 50 per cent below 2019 levels according to ASIC data.

Ashurst partner Emanuel Poulos said he believed the declining rate of tip-offs was due to the level of government support.

“You have had this huge government stimulus package and the insolvency relief and they may have reduced the incentive for struggling businesses to engage in phoenixing,” he said.

“It suggests to me that there’s likely to be an uptick when relief is wound back and this is when you will see the legislation and anti phoenixing task force tested.”

The expected rush of insolvencies is expected to pose a significant issue for the business community more broadly, with many likely to be unable to pay suppliers.

Mr Day said ASIC has been keeping lists of pre-insolvency advisers it believes are coaching businesses to ‘phoenix’ as well as businesses that have been taking steps to transfer assets.

“We’ve done a lot of data work using credit data, ATO ‘phoenix’ risk modelling to identify those companies we think might be in danger of committing misconduct in illegal ‘phoenix’ activity,’’ he said.

“We talk to those directors, we know they’re in difficulty and tell them they have options to avoid breaking the law.”

“In a given week (ASIC) might have four or five conversations (with business directors). It’s not a cops and robbers conversation. We give them the benefit of our experience and tell them about those (directors) that end up with a bad outcome — criminal prosecution.”

“It is a conversation where there is a hot breath of the regulator down their collar and shows them that what they do next will be closely scrutinised.”

ASIC is hoping to use a series of successful actions against phoenixing to flip illegal ‘phoenixes’ to turn witness on those who coached them.

In the last financial year ASIC made five prosecutions and 11 director disqualifications for illegal phoenix activity.

“Once we identify the coaches, we identify all the other companies they were involved with and the directors they provided advice to, we see books and records, they give us a list of names,” Mr Day said.

He said ASIC’s list of ‘phoenix’ coaches would likely increase as insolvency protections were wound back and the agency became aware of “new players and new behaviours”.

“We will continue to monitor new actors and activities that we need to focus on,” he said.

Mr Poulos said it was important for ASIC to “strike a balance” in preventing illegal phoenixing in a way that did not “hamper legitimate restructuring”.