by Charith Seneviratne

The increasing presence of phoenix operators demonstrates that the individual regulators are inadequately equipped to address illegal phoenix activity. In addition to this, current anti-phoenix measures focus’ too heavily on enforcement and prosecution of existing phoenix operators rather than deterrence of future phoenix operator.

Accordingly, the Australian Federal Government (“the Government”) have recently increased their involvement in addressing this widespread issue of illegal phoenix activity. In particular, the Government has proposed to introduce a Department of Liquidation (“the Department”).

The Government have endeavoured to gather recommendations from the general public in respect of the Department’s role and involvement in the Liquidation process. The recommendations for the Department’s role and involvement include, but are not limited to, the following:

  • The Department allocating a Registered Liquidator from a regionally based panel to an insolvent entity to avoid independence issues or raising conflicts of interest.
  • The Department servicing a dedicated phoenix hotline to provide the general public and industry professionals with a single point of contact for reporting illegal phoenix activity.
  • The Department investigating industry advisers who may intentionally or unintentionally assist phoenix operators with illegal tax avoidance schemes.
  • The Department providing funds to Registered Liquidators on certain matters to ensure that the business, property, affairs and financial circumstances of the insolvent entity are properly investigated and reported to creditors, the Australian Securities and Investments Commission, and other interested stakeholders. As such, this would prevent the widespread practice of directors indemnifying Registered Liquidators for their costs.

Overall, the Department would ensure that the Liquidation process is externally administered in a manner that will (supposedly) maximise the return to creditors. For instance, these measures would prevent a director of a company or any other phoenix operator from hand-picking a “friendly” Liquidator that may avoid pursuing recovery actions to the detriment of creditors.

The proposal of establishing the Department has also raised several questions, such as:

  • How will the Government source funding for the Department? Will taxpayers bear the burden of funding this operation?
  • How will the Government assess the commercial viability of establishing the Department?

It’s an interesting time for professionals in the corporate insolvency regime as the Government seeks to transform these written proposals into meaningful actions that will (hopefully) mitigate the illegal activities of phoenix operators.

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