[+] Push to Bury Construction Sector Phoenixing

Moves to crackdown on phoenixing, long a plague on the construction industry, have been branded a toothless tiger that don’t go far enough. Under the practice, directors transfer the business of an existing company to a new company and leave debts in the old company. The directors then abandon or liquidate the first company to avoid paying its debts, creditors and employees. The impact on creditor businesses, many of them small to medium operations, is substantial. A 2019 PwC report, the ‘Economic Impact of Potential Illegal Phoenix Activity’, said phoenixing cost the economy up to $5.13 billion annually. As of January, all directors of Australian companies have been required to register for a Director Identification Number (DIN) or face penalties of up to $1 million. The director ID regime gives regulators and others greater confidence in mapping and tracing relationships between directors and companies over time. Without it, establishing a director’s identity and their history of business behaviour is challenging. It also makes misconduct such as illegal phoenixing difficult to detect. Baker McKenzie Brisbane partner Ian Innes says it’s too early to really understand the role the DIN will play in investigations by liquidators following insolvency collapses. It’s also too soon to know whether it works as a potential deterrent to phoenixing. ▲ The effectiveness of the DIN scheme remains to be seen. “Often real people step in to take on the role of a director in the new company when failed businesses have tried phoenixing in the past. Having a unique DIN won’t stop that,” he says. Australian Restructuring Insolvency and Turnaround Association chief executive John Winter says the new rules are essentially a toothless tiger because of a major disconnect. “We support this policy’s ability to stop fake identities or directors, and acknowledge the DIN is an important tool for liquidators to track down the right director,” he says. “But it doesn’t go far enough. There is no link between your director identity and the company of which you’re a director. It’s a dead end.” Winter is critical of a lack of any real action to stamp out phoenixing. “The whole process of phoenixing has not changed. There’s been no significant initiative to address it. “There is a parliamentary inquiry into corporate insolvency at the moment and the complete lack of enforcement action is one of the issues that we continue to raise.” KPMG Restructuring partner Amanda Coneyworth says one of the main benefits of the director identification numbers is consistency of data. “In the past when undertaking investigations, we used to have trouble trying to pin a director to a company because there are so many different ways to spelling first names, middle names and last names,” she says. ▲ The DIN may be a case of shutting the stable door after the horse has bolted. “It was hard work to piece together that information. So, it’s been useful to get that consistency of data.” But she agrees the DIN can’t prevent phoenixing. This is because using director IDs to uncover phoenixing is retrospective and has limited merit as a preventative tool. “It relies on the liquidator to do the work to understand who’s involved in potential phoenix activity,” Coneyworth says. “The next step is reporting that to ASIC, which may prosecute based on the results of those investigations. “But for the average director, particularly in construction, the ID is not going to act as a deterrent.” In an environment in which the number of construction insolvencies is rising, she notes phoenix activity is sometimes not deliberate. “In construction, directors are generally small business operators. They are reacting to things that are outside their control, in terms of challenges with fixed-price contracts, increased costs and labour shortages,” Coneyworth says. “Directors of failed businesses still need to preserve their livelihood and continue to work. So, a natural solution is to set up another company. “In a director’s mind this course of action isn’t deliberate phoenixing.” Coneyworth says there’s work to be done to educate the broader director community, especially those in construction, about their responsibilities. ▲ KPMG Restructuring partner Amanda Coneyworth: education for directors vital. “This would help directors to be proactive in a situation in which their company is under stress,” she says. “Many directors are not prepared for the role and they are shocked when they understand their duties to prevent insolvent trading. “We encourage them to fully appreciate what their duties entail so they can make better decisions.” Coneyworth says directors need to understand how they are exposed when they sit on a board of a company that fails. “Now Covid support has been completely removed, the ATO is back into full collection mode in terms of recovering tax debts,” she says. “They have also been issuing director penalty notices. That makes the director personally liable for debts of the company. “The message for directors is that their company’s financial affairs are not always separate to their own.” With an uncertain economic outlook and talk of a recession, there’s a lot of attention on finances and solvency in boardrooms at present, KPMG Law partner Hoda Nahlous says. “When I sit in on a board meeting, management talks through every single line on the P&amp;L because the directors want to understand whether they have enough money to pay staff and what their future obligations are.” ▲ KPMG Law partner Hoda Nahlous: ignorance is no excuse. Nahlous also agrees directors may not realise they are acting unlawfully when they engage in phoenixing. “Unfortunately, that’s not enough to get you out of the personal liability you assume if you’ve made terrible decisions you didn’t know were terrible at the time.” Although most people are doing the best that they can with the information they’ve got, there are cases where there is deliberate, intentional misconduct. “It’s not just phoenixing. Misuse of funds and other offences will always happen and these director ID rules won’t change that,” Nahlous says. Baker McKenzie’s Innes says pursuing legitimate insolvency procedures is preferable to phoenixing to reset a company’s financial future. “Directors of companies in distress need to seek advice early and, if necessary, seriously engage with those insolvency options,” he says. “If they don’t, and they try to take a short cut, they and their advisors may commit an offence. Current economic circumstances might deliver the opportunity for regulators to run test cases against them.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Push to Bury Construction Sector Phoenixing

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