MPs urged to stop companies going into liquidation to avoid paying creditors and workers’ entitlements

This article is more than 1 year old

This article is more than 1 year old

New criminal penalties and a scheme to identify company directors are urgently needed to crack down on the scourge of illegal phoenixing activity, according to the peak body of insolvency practitioners.

Both measures are contained in the Morrison government’s Combating Illegal Phoenixing bill but the Australian Restructuring Insolvency & Turnaround Association is frustrated at the pace of reform after the bill was allowed to lapse at the May election.

“Despite the claims of action by government, unfortunately almost nothing is really being done,” the ARITA chief executive, John Winter, told Guardian Australia.

ARITA wrote to federal parliamentarians this week urging them to do more to combat phoenixing – a practice where under-capitalised companies intentionally go into liquidation to avoid paying creditors and workers’ entitlements – warning that reforms should be in place ahead of potential economic downturn.

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PwC estimates that phoenixing cost the Australian economy at least $5bn in 2016-17, including $3.2bn in unpaid bills, $300m in unpaid employee entitlements and $1.7bn in unpaid taxes and compliance costs.

In February the Morrison government introduced the phoenixing bill, which lapsed when parliament was dissolved ahead of the May election. The assistant treasurer, Michael Sukkar, reintroduced it in July.

Sukkar told the House of Representatives illegal phoenixing “has been a problem for many decades” and boasted the bill would give regulators the ability to “prosecute or penalise directors and others who facilitate this illegal activity, such as unscrupulous pre-insolvency advisers”.

Under the new criminal offences illegal asset stripping would attract penalties of up to 10 years imprisonment.

The ARITA report to MPs and senators says the bill “goes some way to addressing this issue and is worthy of support but much more focus is still needed to protect the community as a whole from this scourge”.

ARITA noted the phoenixing bill would also create a director identity number, “linking their past and present directorships to help prevent illegal phoenixing and limit the damage done by inept entrepreneurs”. It said this would require “resourcing and prioritising a complete overhaul of the ASIC register”.

In addition to higher penalties and the director identity number, ARITA wants: a greater focus on enforcement actions by the corporate regulator, Asic; abolition of fees on its members which it claims are “effectively working as an extension of the regulator for free”; and a crackdown on unregulated “pre-insolvency advisors” it claims help companies avoid their obligations.

On Friday Guardian Australia reported that Asic is yet to use powers it gained in April to disqualify company directors or managers who improperly access the taxpayer-funded safety net to pay workers of their failed companies, because the lack of retrospective effect of the laws means no officers eligible for the penalty have yet been identified.

Winter said ARITA had been “pushing the government for reform” because its members “are at the frontline of combatting phoenixing – they uncover it long before the ATO or Asic are even remotely aware of it”.

The safety net for unpaid wages, the Fair Entitlement Guarantee, is expected to cost $882m over the next four years. In the last four years, the commonwealth has recovered just $170m from companies that accessed the scheme, a figure boosted by Queensland Nickel repaying $66m to taxpayers.