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Economics References Committee - 29/09/2015 - Insolvency in the Australian construction industry

WELSH, Associate Professor Michelle, Monash Business School, Monash University

Comm i ttee met at 09:10

CHAIR ( Senator Dastyari ): I now declare open this Senate Economics References Committee inquiry into insolvency in the Australian construction industry. The Senate referred this inquiry to the committee on 4 December 2014 for report by 11 November 2015. The committee has subsequently agreed to extend the reporting date to 3 December. The committee has received 26 submissions, which are available on the committee's website.

These are public proceedings, although the committee may determine or agree to a request to have evidence heard in camera. I remind all witnesses that in giving evidence they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such an action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to the committee. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may also be made at any other time. A witness called to answer a question for the first time should state their full name and the capacity in which they appear.

Before starting the hearing in earnest, please note that because of the nature of this inquiry, allegations of insolvent trading, nonpayment of debts and/or failing or deliberately arranging affairs so as to avoid paying workers entitlements or related conduct may have been made or could be made against certain named individuals or organisations. The committee may decide to publish material that contains adverse comments. The committee wishes to inform people that they have the right to respond to any such adverse reflections made against them. If you would like to take the opportunity to respond to adverse comments made about you in written submissions or in evidence taken during public hearings, please contact the committee secretariat. Any response to adverse comments should be confined strictly to the adverse comments made about you. I would, however, urge all witnesses to be mindful when giving evidence to refrain from naming specific individuals in connection with the alleged wrongdoing unless absolutely necessary or if the matter is already on the public record.

I now welcome Associate Professor Michelle Welsh. Thank you for appearing before us today. I was wondering if you had a brief opening statement or remark that you would like to make, and then we will get to questions.

Prof. Welsh : I, along with my colleagues; Associate Professor Helen Anderson and Professors Ian Ramsay and Ann O'Connell, are the chief investigators on a joint Monash Business School and Melbourne Law School three-year ARC funded project in which we are investigating phoenix activity, and we are in the second year of that project. The aim of our project is to devise ways in which this damaging behaviour can be most efficiently and effectively prevented, interrupted and/or deterred without damaging legitimate business activities to the detriment of the economy. I should point out that our project looks at phoenix activity generally and we are not focused on the construction industry.

To date, our project has produced one major report which is entitled Defining and profiling phoenix activity, and we previously supplied the URL for that report to the committee. This report may be of some use to the committee as it profiles and categorises the various types of phoenix activity, considers the existing legislative responses and raises important policy questions. The report does not draw any conclusions as to the desirability of any of the solutions suggested by the substance of our policy questions, as that is a task we will be looking at next year.

Currently, we are working on our second report, which is entitled Quantifying phoenix activity: cost, incidence and enforcement, and in that report we bring together all of the available public data as well as some data that some of the regulators have supplied to us on our request. We anticipate that that report will be finalised and released by the end of October and, while it is not concentrated on the construction industry, we anticipate the report may be of some use to the committee and we are happy to forward a copy of it to you when we release it should that be desirable to the senators. I am happy to take questions about that report today; but as it has not been finalised yet, I might need to take some of those on notice. Next year we are planning to work on our third report, which, among other things. will examine the regulatory approach to this issue taken in other jurisdictions and we will put forward our recommendations for reform.

I would like to clarify one thing that I read about our submission in the Hansard of this committee's hearings on Friday, 12 June, at page 6. In a question to Mr Noonan, Senator Cameron, you referred to our submission and noted that we had indicated that there are a range of current enforcement mechanisms such as the directors duties and disqualification provisions et cetera. You then went on to refer to submissions made by ASIC, the ATO and others and said that their submissions were that these laws should work; that we should just wait until there is a Productivity Commission inquiry and that you have these laws in place and everything should be okay. When I was reading the Hansard it was not clear to me whether you were still referring to our submission when you were talking about their submissions. I thought it was important to clarify for the committee that that statement was not part of our submission. As I said, we have not yet determined what our conclusions or proposals for reform will be, but I do feel confident in saying that we will not conclude that the current arrangements should work and that we have laws in place and everything should be okay. I wanted to clarify that.

Senator CAMERON: If I could just clarify for the record that I was not referring to your submission.

Prof. Welsh : Thank you.

Senator CAMERON: Professor, you talk about the damaging aspects of phoenix activity. Can you outline what you have seen as the damaging aspects? Could you give us some idea of how that would operate in the building and construction industry.

Prof. Welsh : We have quite a lot of detail of that in this report that we are about to release so we will be able to give you some more information when that comes out. Certainly we are concerned about the impact on employees specifically, as well as subcontractors and other unsecured creditors. It looks like the amount of loss is quite significant in this sector. I probably cannot say more than that but there is significant damage. We will be able to provide more details when the report comes out.

Senator CAMERON: The ATO yesterday indicated that there was something like $600 million a year lost in tax income as a result of unpaid debt in the construction industry. They say $1.8 billion over three years. Is that consistent with what you are finding?

Prof. Welsh : Yes, it would be. The problem we have with the data is that it is really hard to pinpoint what percentage of that comes from illegal phoenix activity.

Senator CAMERON: They also indicated that in the building and construction industry alone there was over $3 billion per annum of unpaid debt.

Prof. Welsh : Yes, that sounds about right.

Senator CAMERON: Sounds about right?

Prof. Welsh : Yes.

Senator CAMERON: That was not including some statutory entitlements. Is that true?

Prof. Welsh : Yes, I think so.

Senator CAMERON: The other area we have been looking at is the implications for productivity in the industry. Are you looking at any of the issues of productivity and innovation? What are the implications for this phoenixing in the industry?

Prof. Welsh : No, we have not collected any data on that.

Senator CAMERON: Do you think anecdotally there would be a link?

Prof. Welsh : Yes, I think so.

Senator CAMERON: Are there aspects of the law that you have had a look at that you think may need change?

Prof. Welsh : Obviously, it is a very complex problem that has to be attacked in various ways. We think that probably the provisions are there but one way of interrupting this type of activity could be to make it harder at the beginning, or by putting barriers in place at the beginning to interrupt this type of behaviour. One of the things that we are on the record as recommending is a director identification number which would work in a similar way to applying for a passport or a bank account where you need to have a 100 points identity check. We believe that there is some merit in arguing that in order to incorporate a company and to become a director of a company that we should be requiring people to provide that identification. That would then allow ASIC, to some degree, to track people who are being directors of multiple companies. Of course, it would not be fraud-proof, but it would be some way of doing that.

We have not yet really got to the point of considering changes to the legislation. The directors duties seem to cover this kind of behaviour. So I really cannot comment yet on whether we would be prepared to recommend changes to those types of provisions.

Senator CAMERON: So, at the moment, you have looked at the defining of phoenix activity. That is your first report.

Prof. Welsh : Yes.

Senator CAMERON: And the second report is going to be quantifying the phoenix activity, and the third is the annual look at the regulatory issues.

Prof. Welsh : That is right.

Senator CAMERON: So when do you see the final report being completed?

Prof. Welsh : We have another year and a bit to work on the project. So it would be some time after the end of next year—hopefully early 2017.

Senator CAMERON: Who is funding this project?

Prof. Welsh : It is the ARC, the Australian Research Council.

Senator CAMERON: We have had specific evidence and submissions that say that the law is not working effectively—the security of payments law that is in there—and that there is a rash of false statutory declarations. Are you aware of that?

Prof. Welsh : I have seen ASIC's comments on that. As I said at the beginning, we are not specifically looking at phoenix in the construction industry. So we have not looked at those provisions specifically.

Senator CAMERON: One of the proposals to resolve these issues is for there to be a mandatory trust fund. Have you given any thought as to whether a mandatory trust fund would be a beneficial approach in the industry?

Prof. Welsh : Once again, no, we have not, because we have not been concentrating on the construction industry. I have seen those proposals, but we have not yet examined them.

Senator CAMERON: Have you looked at any overseas laws that may deal with this better than what we have in Australia?

Prof. Welsh : We are starting to do that. For example, in Ireland, they have a provision that requires liquidators to apply for a restriction order on directors if there have been multiple failures. That is one of the things that we are going to look at and try to assess whether that has been effective or not. But, once again, it is a bit early for us to be commenting on that.

Senator CAMERON: I am just a bit concerned. You said earlier in your submission—correct me if I am wrong—that you think there are laws there to deal with the issue.

Prof. Welsh : Yes.

Senator CAMERON: But then you said that you are not looking at the regulatory approach until the third tranche of your research work. So have you come to a conclusion without doing your third tranche of work?

Prof. Welsh : No, we have not come to a conclusion yet. All I am saying is that there are things like the directors duty provisions there which, on the face of them, would look like they would cover the types of activity that is engaged. But we could not say that conclusive as yet. So, no, we have not come to a conclusion on that.

Senator CAMERON: The evidence that we are getting is that the use of any legal action against directors is just not happening. Are you aware of that?

Prof. Welsh : Yes. I think that the provisions are there. It is a separate question as to whether or not they are able to be enforced or are being enforced. So I think enforcement is a separate issue. So, yes, I am aware of that.

Senator BUSHBY: Have you look at that issue yet?

Prof. Welsh : We will be. In our report that we are about to put out we have data in there on the number of enforcement actions that have been run. We will be able to give that data to you at the end of October.

Senator BUSHBY: You said before that whether they are able to be enforced is a separate issue.

Prof. Welsh : Yes.

Senator BUSHBY: That is a separate issue as well from whether they are being enforced as well as able to be enforced.

Prof. Welsh : Yes.

Senator BUSHBY: You say the rules are there.

Prof. Welsh : Yes.

Senator BUSHBY: So you think in some respects the rules are there to be able to deal with it. From what you have done so far, do you think that the problem is that they are not able to be enforced or that people are choosing not to enforce them?

Prof. Welsh : No, I would not say that people are choosing not to enforce them. We have been working with the regulators and with a number of other bodies, and our impression is that the people we are working with are really committed to trying to do something about this problem. But whether or not they have sufficient resources to do that is, I think, another issue.

Senator BUSHBY: So the issue is resources rather than a flaw in the law?

Prof. Welsh : Yes, I think so. But, once again, I am sort of pre-empting what we might find next year. At the end of October we will be able to release the information we have about how many enforcement actions have been run.

Senator CAMERON: From the submissions we had from the ATO and ASIC yesterday, as we understand it, it is a bit more complex in terms of section 206 of the Corporations Act, which covers disqualification of directors, and also in terms of the need for intent and how you define 'intent'. Have you looked at any of that?

Prof. Welsh : Not yet.

Senator CAMERON: So that will be your third tranche, will it?

Prof. Welsh : Yes.

Senator CAMERON: The issue that we are seeing is that ATO and ASIC cannot act in real time. So when you are looking at your third tranche maybe you should talk to them about what they see as the difficulties in the law. They do not see the law as providing real-time solutions. They also see problems with the quality of the evidence they are getting from some of the liquidators. So there is a range of problems. The arguments that we are getting from a small group of witnesses is that if you just implement the current laws everything will be okay. But the regulators are actually raising some significant problems with the current laws. When will you start looking at the second and third tranche?

Prof. Welsh : Probably from October onwards. Once we have released the next report—that is our next task—we will then move on to looking at that.

Senator CAMERON: So you have finishing defining phoenix activity?

Prof. Welsh : Yes.

Senator CAMERON: What is your definition of phoenix activity?

Prof. Welsh : We have come up with five different categories of phoenix activity. The first one we have called the 'legal phoenix' or 'business rescue'. That is where you have genuinely honest businesspeople who have hit some sort of hardship and the company ends up going into liquidation and the outcome for the company's creditors and employees in those situations is actually better if the business is sold for the best price you can get to those original controllers. Just because a company collapses and the controllers of old code take over new code does not necessarily mean that there is anything illegal if it is all done transparently and the best price is paid for the asset. That is our first category.

The second one is what we have called the 'problematic phoenix', which is similar to legal. So we are not suggesting that there is any illegality. It is where you get this behaviour repeated over a number of times. It is your hapless entrepreneur who is never going to be able to make a go of it who continually does this and causes great loss to employees and creditors. We feel that, for those types of phoenix, there should be some way that ASIC can intervene, whether it is via section 206 and the banning order for multiple failed companies or some other way, to stop that person creating yet another company. I guess that would be the sort of thing that we might recommend, and it would be up to parliament to come up with how many times you think it is okay for someone to keep doing this.

So those are our first two categories. The next three are all what we call 'illegal'. This is where there is actually an intention to avoid debts when you are going through this process. They all involve a similar type of process, but in the first type of illegal the improper intention to transfer the assets at undervalue is formed as the company is approaching insolvency. So you have a businessperson who, until that point, was trying to make a go of it but at that point comes up with this scheme to phoenix the company. In those types of phoenixes we think that turnaround specialists are becoming a real problem. So the people who are in trouble go and get advice, and there is a suggestion that some of this advice is being given.

The fourth type we have called our 'illegal type 2' phoenix. We have described this as 'phoenix as a business model'. These are people who deliberately set up companies with the intention of phoenixing them—with the intention that the company itself will never succeed, usually intending to avoid tax debts and other debts. They go into business with the idea of phoenixing.

Our fifth category is what we have called 'complex illegal phoenix activity'. These types of phoenixes exhibit the same characteristics as our second type of illegal phoenix, in that they are deliberately set up to avoid debts, but they also coincide with some other forms of illegality such as use of false invoices, GST fraud, money laundering and those sorts of things. They are the really bad ones. Those are our five different categories.

Senator CAMERON: When you look at these five different categories, you move very quickly from legal to problematic, and then quickly on to the different types of illegal activity. We seem to have some evidence on the business model operation. How did you come across this business model type of approach?

Prof. Welsh : Through the work that we have done talking to different people, different regulators, and also with the literature work that we have done. Helen Anderson, one of the members of our team, has a long academic history looking at insolvency, so she is probably the one who came up with that, I would imagine. So it is just working through, and over time we developed these five different categories.

Senator CAMERON: We have also had evidence of the type 3, with the turnaround specialists. It seems to be like a new bottom-of-the-harbour scheme, where people are setting up with one goal, to avoid paying tax and avoid paying their debts. Have you come across the proposition that these people are actually tendering below what is a profitable tender to get the job, and then they make money because they are not going to pay their tax, they are not going to pay their debts, and everyone else is left with the mess. Is that what number 3 does?

Prof. Welsh : Yes.

Senator CAMERON: Do you have any examples of that?

Prof. Welsh : I am not sure if there were any in our submission.

Senator BUSHBY: Is that number 3 or number 4?

Prof. Welsh : It is number 4—the business model.

Senator CAMERON: I am talking about the turnaround specialists—type 3. There is a bit of a linkage here between 3 and 4.

Prof. Welsh : I think what you are saying fits more with 4, when you are talking about people deliberately setting up business for that purpose. But there could also be a problem with the turnaround specialist as well.

Senator BUSHBY: With 4.

Senator CAMERON: And 3.

Prof. Welsh : The difference between 3 and 4 is that number 3 is the person who honestly goes into business hoping to succeed—

Senator BUSHBY: And does dodgy stuff at the end.

Prof. Welsh : Yes. What we are saying is that if that person goes to one of these turnaround specialists for advice and has never thought about this before, and then it is presented to them as an idea, that is an issue. But it is also an issue at number 4 if people are doing this as a business model and with the assistance of someone.

Senator BUSHBY: With advice of some sort.

Prof. Welsh : Yes.

Senator CAMERON: Is this an emerging issue—the turnaround specialists?

Prof. Welsh : We think it is. It is something that we are quite concerned about and want to do some more research on.

Senator CAMERON: These are 'professionals' in inverted commas, who are saying to a company that might run into trouble, 'Here's how we can fix it for you—we can phoenix you so you won't pay any debt, you won't pay any tax and you can set up using, say, your wife or your son or somebody that used to work for you; set up another business, you can have real control, but all your debts are gone.' Is that the type of thing?

Prof. Welsh : Yes. You certainly hear them advertising—'If your business is in trouble, come and see us and we will help you out of your debt.' That is the implication, and we are worried that that is what they are advising people to do. There is the ASIC v Somerville case, where ASIC took action against a solicitor who was arranging these sorts of schemes for his clients. That is one example where there has been action taken, but we suspect that it is going on. The other problem is that, as far as I am aware, these turnaround specialists are not regulated in any way.

Senator CAMERON: So they are not part of the insolvency group, but there could be insolvency specialists who are going into this other area.

Prof. Welsh : There could be, I suppose, yes.

Senator BUSHBY: Is it currently illegal to provide that advice? Is it captured anywhere?

Prof. Welsh : You have to show that they are aiding and abetting a breach of the director's duties. Once again, it gets back to how effectively those provisions can be enforced. Wherever there is any grey area about where the line has to be drawn, I think there is an issue. If the advisers think that they are getting towards the edge of what is legal and what is not and they are not sure where the boundary is that is a problem.

Senator BUSHBY: If they are not sure they should not be going there.

Prof. Welsh : Yes. It is also a problem because there are probably a lot of people out there who do not realise that what they are doing could be a breach of the director's duties. So if they go to a turnaround specialist who says, 'I can fix your problem for you—all you do is incorporate'—

Senator BUSHBY: It sounds good.

Prof. Welsh : Yes. Maybe one of the things that we will recommend is that there has to be greater publicity about the fact that this is not the right thing to do.

Senator CAMERON: The issue of the director identification number has been raised with us on a number of occasions now. Obviously that seems like common sense. At the moment it is very loose, isn't it?

Prof. Welsh : Yes.

Senator CAMERON: The evidence we had yesterday from Veda Advantage was that there is concern in terms of the some of the terrorism laws, that we need tightening up to be able to identify people. I do not want to be running terrorism in the building and construction industry. They raised that yesterday, which was very interesting. You can simply change your first name or your date of birth and that throws the whole system into confusion. You just set another company up and the linkage between them may not be picked up. Is that your understanding?

Prof. Welsh : Yes, that is right. I think I can go and register as Michelle Welsh and another one as Michelle A Welsh, and I do not think it would ever be put together that it was the same. That is my understanding of how it works.

Senator CAMERON: So phoenixing could be a much bigger problem than people understand, because of that one issue. Just being able to identify who has effective control of a company is a problem, isn't it?

Prof. Welsh : Yes. I think the problem from our perspective, trying to quantify this, is that it is impossible to do it. Even when you have all the data from ASIC—we have a lot of their data that have come through their EXAD reports. I do not know if they were talking to you about that, but they are the reports from the insolvency practitioners. Even if you look at the maximum number of insolvencies and say that a percentage of those are going to be phoenix, you cannot have any confidence in what that percentage would be. Similarly, there are a number of dormant companies that are never wound up, so you could not just say that the maximum number of insolvencies is phoenix—it might actually be more than that because there might be some in the dormant pool. It is all very hard to tell. One thing we would like to see is greater reporting requirements. Currently the liquidators—

Senator CAMERON: Shock horror—not more red tape!

Prof. Welsh : No. Liquidators have to fill out—

Senator CAMERON: For the purposes of Hansard, I am being funny.

Prof. Welsh : The liquidators are required to report and have to indicate if they think there has been any civil or criminal misconduct. We think—I am pre-empting again, but I think this will be one of our recommendations—that it would be very handy if there was a box they had to tick to say if they suspected there was phoenix activity going on, and a box they would have to tick to say whether assets were transferred at under value to the previous controllers. Something like that that would then let people like yourselves who want to get a fix on how often this is happening actually get some good data on it. I do not know that that is really any extra red tape, because it would just be an extra tick box in the line of tick boxes that they are currently already ticking.

Senator CAMERON: Can I go to number 2, the problematic phoenix. You describe them as just a hopeless entrepreneur.

Prof. Welsh : I think I said hapless.

Senator CAMERON: Hapless, hopeless—is there much difference?

Prof. Welsh : That is right.

CHAIR: Hapless is more endearing!

Senator CAMERON: We have had some submissions to say that the state regulators should lift the entry standard into the industry. For instance, you cannot finish your apprenticeship as a carpenter on the Friday and set up a business on the Monday. You do not just pass some very basic tests and have that set you up in your business. Some people are arguing that you have got to lift that quality so that people can actually run a business. On the other hand, we are getting arguments that say that would simply stop the flow of people coming into the industry. That has been described by some of those who say you cannot just keep pouring people in as cannon fodder for the big business players to use up and spit out. Have you come across that issue?

Prof. Welsh : Not specifically, because, as I said, we are not looking at the construction industry. Generally speaking, I think it is too easy for people to do this. Even if the regulators' funding were increased by multiples, they are never going to be able to catch and take enforcement action against everyone who engages in this type of activity. I do think there have to be some barriers to entry, but balance that against the economic imperatives of allowing people to try to go into business. I do not know what the answer to that is, but I definitely think we need to do something at the beginning to make it a bit harder.

Phoenixing is easy, cheap and not transparent, so I think that is what we need to be doing to try to develop something to make it not as easy and more transparent. Those are the types of things that we are looking at. Perhaps what you are talking about would fit into that if you were introducing extra requirements.

Senator CAMERON: If a business actually gets a contract from a developer and then has to hold the contractual money in trust to make sure that someone on that job is actually paid, would that militate against some of these companies having to phoenix at all, because they are getting paid and are a viable business?

Prof. Welsh : It would certainly help with the trickle-down insolvency effect. The problem is that, if you have got someone at the top who goes insolvent, all the subcontractors underneath can fall. Whether the subcontractors themselves are phoenixing is a completely separate issue. We have not looked at trusts, so I cannot comment on whether or not that would be effective, but certainly, if there is something to make sure people are getting to paid, you are going to see less insolvencies of companies underneath them that are relying on that payment.

Senator CAMERON: There seems to be one aspect of your research that is not there. You are defining phoenix activity but then quantifying and looking at regulation at the end. As part of your definition work have you looked at why people are in phoenixing positions? You have your five different definitions, but what are the underlying problems that are creating this phenomenon?

Prof. Welsh : If you look at the different definitions, it would tie back to those. Our category 2 is because we have a system that allows people to try and try again regardless of what damage they are causing. That is the underlying problem with that type. I suspect that with some of the others it is because, as I said, it is easy to do it and cheap. Some people know they are doing the wrong thing and they are happy to do the wrong thing. For others—maybe with our category 3, when it is the first time and they are doing it as their business is failing and they are desperate—if they get advice to do this and they do not realise it is the wrong thing to do, or they turn a blind eye to the fact that it is the wrong thing to do, maybe that is the cause of it happening with them.

Senator CAMERON: This is the turnaround specialists?

Prof. Welsh : Yes. That would be our category 3. Maybe the underlying cause is that the system lets it happen.

Senator CAMERON: You have not come to a conclusion about whether it is an effective application of current law, or that there is a need for a new law, but you have indicated that you think there is a need for some change?

Prof. Welsh : Yes. I think there is a need for some change at both ends—at making it harder to do it in the first place, and some changes at the other end. There have been recent initiatives that we think are really good things, like the Interagency Forum. We think that increased communication amongst the regulators and the sharing of data will be part of the solution.

Senator CAMERON: I am getting to the view that you can share as much data as you like, but, if you do not have the tools to deal with the data you get, what is the point? It keeps coming back to the issue that tradies do not get paid in the building and construction industry. Part of that is because of phoenixing. The other aspect is that these turnaround specialists are advising people to just get rid of your debt, set up another company, and set that company up deliberately not to pay debt and not to pay tax and thus get a competitive advantage in a tender. So you could actually get crossover between these, couldn't you?

Prof. Welsh : Yes. When I was saying at the beginning that the provisions are there, there are certainly the directors' duty breaches and things like that, but whether or not we need some other sort of enforcement regime to back them up will be something we will be looking at. People have asked us whether we think you need a specific phoenixing offence. At the moment we think that is probably not a good idea because it would be too hard to define it. The more detail that is in the legislation the harder it is going to be to prove. So we do not think that that is the way to go. That is the type of thing I am thinking about when you ask me whether I think the provisions are currently there. The way we have defined the activity will be caught by the directors' duties, but whether or not we need easier ways of disqualifying directors and all those sorts of things is, I think, something that needs to be looked at.

Senator CAMERON: Are there other areas of corporate law that are so difficult to define? You may not know the answer to that.

Prof. Welsh : No, I don't.

Senator CAMERON: The question just popped into my head. Why is this so difficult to define?

Prof. Welsh : I do not know the answer to that.

Senator CAMERON: At the moment the definition for illegal phoenixing is intent. How do you deal with intent?

Prof. Welsh : The way we have defined it is by saying that it is when you intend to transfer the assets at under the market value. That would be covered by the directors' duties, such as misuse of position and all that sort of stuff.

Senator CAMERON: Going back to number 2, the argument is, 'I am just a hapless or hopeless entrepreneur. I did not intend to do this. I am just hopeless.'

Prof. Welsh : You could, so maybe we need something that says once you have done it—I don't know what the number is, but let's say it is five times—we do not let you incorporate your sixth company.

Senator CAMERON: So if you end up with 30-plus companies you would think then that you would say there are warning signs here?

Prof. Welsh : Yes. In Ireland, for example, they have a provision allowing you to be a director of up to 20, I think, companies at a time. Maybe that is something we need to look at. But, once again, we are not sure how effectively that works. You would need to have that in place with something like the director identification number, because otherwise I could have 20 as Michelle Welsh and 20 as Michelle A Welsh.

Senator BUSHBY: On the subject of intent, intent is a necessary ingredient in every criminal action. So there is a very deep body of jurisprudence in terms of being able to examine what may constitute intent.

Prof. Welsh : Yes.

Senator BUSHBY: I think that the sorts of things you are talking about are very relevant, but intent is something that—

Prof. Welsh : Yes.

Senator CAMERON: The judge can say, 'You are not hapless. You intended to do this.'

Prof. Welsh : With the directors' duties, though, they are also enforced by the civil penalty regime, so ASIC can take action against directors for breaches of duty and then do not have to prove intention to the criminal standard. So they do have some options—either criminal or civil actions.

Senator CAMERON: What engagement have you had with ASIC and the ATO in terms of your research?

Prof. Welsh : We have had a lot engagement with them. Helen Anderson is the lead investigator on this project. Unfortunately, she is away at the moment. She and I have done presentations at the Interagency Forum. They have also been very good with giving us data we have needed. Also, we have conducted interviews with them. So we have been working with a wide range of stakeholders—not only the regulators, but some of the other people who are involved. ARITA and some of the unions have been helping us out with some data.

Senator CAMERON: At the moment the ATO has their phoenix risk model, their phoenix task force and their phoenix watch list. There is the ASIC surveillance campaign and the Inter-Agency Phoenix Forum. There is lots of froth and bubble and not much action, is there? It is not really fixing it. It looks a bit agitated and everything is going, but these companies are still phoenixing and still ripping off tradies and small companies. It is just not working at the moment, is it?

Prof. Welsh : No, and that is why we are doing the project. It is to try to see what is going on and what we can recommend to hopefully improve it.

Senator CAMERON: People can just establish all of these companies and phoenix and be pretty confident nothing will happen.

Prof. Welsh : Yes.

Senator CAMERON: Those are the facts at the moment, aren't they?

Prof. Welsh : From the data we have it looks like it is going on a lot. But as I said it is really hard to draw a conclusion about what the data actually is, because no-one is collecting it. If the regulators were instructed to actually collect it that would be a good outcome. That is why we are thinking with these EXAD reports that the liquidators are the ones who are closest to the action, so if they can say to ASIC, 'We think this is a potential phoenix, or we think assets were transferred at under their value,' that would go to part of it. Then you have to look at the enforcement and what is happening with it.

Senator CAMERON: On the issue of the liquidators and ASIC, in their evidence yesterday the liquidators were extremely critical of ASIC, but you would not have seen this.

Prof. Welsh : No.

Senator CAMERON: But ASIC were equally critical of liquidators. The regulator and an important tool for regulation in the industry—namely, the liquidator—are basically at each other's throat. What is the problem here? Have you looked at any of that?

Prof. Welsh : I am aware of it, but I do not know what the cause of it is. I have heard it said before.

Senator CAMERON: It was said yesterday in evidence that that was the problem. In fact the quality of the liquidators' responses to ASIC do not allow them to deal with things in time, so the phoenixed companies have time to shuffle all their assets out, and by the time ASIC is in a position where it can run a case there is no money left. It is in another company with another new name.

Prof. Welsh : To be honest, I am not sure. Helen Anderson would have more of an idea about that. I am happy to take it on notice if you want me to.

Senator CAMERON: Just have a look and see if you have come across that. That is the rule of the liquidator. The quality of the liquidators and the timeliness of reports would be the two issues. Also, ASIC and the ATO indicated yesterday that there are now liquidators illegally advising companies. Have you heard of this?

Prof. Welsh : No. I will ask Helen and get back to you. All I can say is that we have had a lot of assistance from ARITA. I know that the people at ARITA are very concerned about phoenixing. They have been very helpful to us and they think our project is very important. That is really all I can say, but I will ask Helen about that.

Senator CAMERON: On the question of how you move forward on this, you will not be dealing with that for at least another 12 months?

Prof. Welsh : We will be working on it but we will not be in a position to release anything before the end of next year.

Senator CAMERON: Does the information asymmetry in the industry on these issues surprise you?

Prof. Welsh : No.

Senator CAMERON: It surprises me.

Prof. Welsh : One of the things we have found—

Senator CAMERON: There are armies of public servants looking at this stuff and they have to depend on you guys to tell them what is what.

Prof. Welsh : I think the recent initiatives with the Interagency Forum and things like that, which I think are designed to deal with some of those issues, will hopefully have very good outcomes.

Senator CAMERON: Other than froth and bubble?

Prof. Welsh : Yes.

Senator CAMERON: You are more optimistic than me.

Prof. Welsh : Yes.

Senator CAMERON: You indicated that it was very difficult to measure this. Are there any issues on the information asymmetry that we should look at? We might be able to finally tie down some shonky businessperson who is changing their name to form a new company. That is one, but there is all this other information—the cost.

Prof. Welsh : In our submission we talk about the unions and the superannuation funds having information. If there is some way that this could flow through to the regulators more quickly that might help.

Senator CAMERON: Is that non-payment of superannuation, for instance?

Prof. Welsh : Yes. It is not something I look at personally, but Helen was looking at it. Our submission states that that would be one way of increasing some sort of information flow. In our report we are putting out we have a section that talks about how information flows or does not flow amongst the regulators. I definitely think that asking the liquidators to tell ASIC when they think there is phoenixing behaviour going on would be a good improvement to the system.

Senator CAMERON: Are you aware of the Walton insolvency?

Prof. Welsh : Yes.

Senator CAMERON: There was phoenixing involved in Walton. It has been put to us that NAB did their own private analysis of Walton Construction and then used that to try to mitigate their exposure to Walton. They actually set up a group called Mawson to do some business turnaround—this comes into all your different aspects—and the liquidator had a link to Mawson. So there is all this interconnected approach. That is why people have said that it is a bit like the bottom of the harbour, where people are all getting together to protect their own interests. What happens is that the sacrificial drip at the bottom is the tradies and the small contractors, because NAB looks after its backside and everyone else is left totally exposed. Have you come across any of that?

Prof. Welsh : Certainly the example you are talking about. I am not aware of any others, but it would not surprise me if that is what is going on.

Senator CAMERON: That is part of this new emerging business model. Is that wider than the construction industry?

Prof. Welsh : Yes.

Senator CAMERON: So this is a national problem?

Prof. Welsh : Yes.

Senator CAMERON: It is not just building and construction?

Prof. Welsh : No. We have heard anecdotally that it is a major problem in building and construction, but it is also a problem across the economy generally.

Senator CAMERON: If you have been looking at other areas, the estimate is that there is $3 billion in non-payments in the construction industry alone, and tax revenue of $600 million a year not paid. What are the implications across the economy of this?

Prof. Welsh : It is huge, but, once again, we cannot put a figure on it because we do not know from the data that is there how many of these insolvencies are phoenix because no-one is asking the question. So it is the same problem. We have looked at the PricewaterhouseCoopers estimates. I have forgotten what the actual figure is—I know you have had submissions that talk about it—but it is a huge number.

Senator CAMERON: Have you ever wondered why this has not been a major issue in political and economic debate?

Prof. Welsh : Yes.

Senator CAMERON: I just cannot understand it.

Prof. Welsh : Neither can I.

Senator CAMERON: You cannot understand it?

Prof. Welsh : No.

Senator CAMERON: Have you asked the question?

Prof. Welsh : We talk about it amongst ourselves. We think it is a huge problem, and that is why we are doing this project. We are all committed to try and come up with some practical way of doing something about it. That is what we are working towards

Senator CAMERON: So what we are doing in building and construction on this issue could just be the tip of the iceberg.

Prof. Welsh : Yes.

Senator CAMERON: I just wonder what the implications are for the economy. I wonder how many hospitals and schools could be built if people paid their tax and if people were employed and understood that they were going to be in a job.

Prof. Welsh : That is right, yes.

Senator CAMERON: This must affect business confidence as well.

Prof. Welsh : Yes.

Senator CAMERON: Have you looked at that?

Prof. Welsh : No, we have not.

Senator CAMERON: Why would you invest? Why would you set up a small company in, say, the building and construction industry if you are not sure you are ever going to get paid?

Prof. Welsh : I know—if you are competing against people who are using this as a business model and are pricing without the tax in it. We think it is a huge problem.

Senator CAMERON: The big end of town can look after themselves. They will get, basically, insider information, so they can protect their exposure, and the exposure is then all cascaded down to the tradies and the small businesses and industry. That is how it works, is it?

Prof. Welsh : Certainly in the example you gave, of Walton's, that was how it worked. We suspect that that is going on across a whole lot of different scales.

Senator CAMERON: I suppose you can set up a royal commission and look at issues like right of entry and attack your political opponents, but this is the main game, isn't it?

Prof. Welsh : We think it is a very important issue.

Senator CAMERON: This is the main game to try and improve productivity and improve payment security. That is what we should be looking at.

Prof. Welsh : Yes.

CHAIR: Thank you so much for being with us and for being part of our inquiry.

Prof. Welsh : Thank you.