The Australian government wants to introduce director identification numbers to prevent phoenix companies

Photo: Adria Malcolm/Getty Images

Members of boards of directors will now have to have unique director identification numbers as a way of combating phoenix companies where businesses are sent broke but their assets rise again in another company.

The federal government says illegal phoenixing costs the economy up to $3.2 billion a year. Among the latest measures are making directors personally liable for GST liabilities and preventing directors from backdating their resignations to avoid personal liability.

The idea of a unique director number, recommended by the Productivity Commission in 2015, is being introduced to assist in the identification of recurring company failures as rogue directors shift themselves and assets to a new company but leave behind debts.

The AICD (Australian Institute of Company Directors) supports the unique number as a way of tackling illegal phoenix activity and punishing those behind such economically damaging behaviour.

“The vast majority of Australia’s 2.5 million directors govern their companies with integrity and accountability,” according to AICD chair Elizabeth Proust.

“Unfortunately, fraudulent phoenix activity by a small number of people hurts the economy, employees and creditors.”

Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, says the unique director identifier will enable identification of rogue directors to ensure they can’t be involved in multiple instances of phoenixing.

“Phoenixing hurts small business,” she says. “When companies phoenix it’s usually the subcontractors and small businesses who suffer; they’re the ones who aren’t paid.”

In another major reform, company directors will now be allowed to take reasonable steps to restructure their company in certain circumstances rather than rushing to go into administration.

The reforms provide directors with a safe harbour from personal civil liability during the restructure phase.

The AICD says the reforms have the potential to lead a cultural shift in Australian business, saving potentially thousands of jobs and billions of dollars.

“Australia’s insolvency laws were widely viewed as among the harshest in the world,” says the AICD.

“They created incentives to pull the trigger on administration or liquidation too early, prematurely wiping out jobs and value. They also acted as a barrier to start-ups and scale-ups, the very businesses which stand to create thousands of jobs for the future.”

However, David Kerr, a partner in restructuring and recovery at RSM Australia, says the government’s activity in legislative reform is inconsistent.

“On one hand the government is trumpeting the reforms providing a safe harbour for directors to enjoy protection from claims for insolvent trading, reducing the period of bankruptcy and seeking to enliven a turnaround culture for failing business,” he says.

“On the other the government is seeking to demonstrate they will not countenance phoenix activity that costs the government and the economy billions. There is a fundamental tension between the Government’s innovation agenda and the regulation of white collar crime.

“This tension is brought about by the piecemeal approach taken by this government and its predecessors to the reform of restructuring and insolvency law and practice.”

He says the most recent suite of insolvency law amendments have their origins in misconduct by a single insolvency practitioner between 2006 and 2009. The individual was convicted in 2011 and was released on parole in 2015.

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