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Thursday, 1 March 2012
Page: 2467

Mr KELVIN THOMSON (Wills) (10:50): When I was in my office I had the opportunity to listen to a contribution by the member for Newcastle and I want to associate myself with her remarks and also acknowledge her work over many years in this place in the cause of good corporate conduct. The member for Swan sought more explanation of the Corporations Amendment (Phoenixing and Other Measures) Bill 2012, and I am happy to provide it to him and to the House.

This bill contains amendments that give the corporate watchdog, the Australian Securities and Investments Commission, ASIC, the power to order the winding up of abandoned companies, allowing workers to access their entitlements. The bill implements an important aspect of the government's Protecting Workers' Entitlements Package election commitment. That commitment included cracking down on companies that undertake phoenix company behaviour, which is of course where a business closes down one day and opens up shortly afterwards with a different name to avoid paying its legal obligations. This is grossly unethical behaviour, and I have always supported actions by governments of either political persuasion to tackle it. At present, employees have to apply to the courts and incur legal costs in order to place the abandoned company into liquidation before they can access the government's General Employee Entitlements and Redundancy Scheme, GEERS. This can be very onerous and unfair for employees, who quite reasonably feel that it is their money and that they should not have to spend good money to get access to their own money.

Since 1 January 2011, the government has improved the protection of employee entitlements by amending GEERS, and this bill will allow the Australian Securities and Investments Commission to wind up a company where it has been abandoned by its directors. Specifically, the bill will provide ASIC with the following discretionary powers: firstly, the power to place a company into liquidation in circumstances where ASIC currently has a power to deregister the company; secondly, the power to reinstate any deregistered company and immediately place it into liquidation; and, thirdly, the power to place a company into liquidation where ASIC has reason to believe that the company is no longer carrying on business. This means that the corporate watchdog can step in and wind up a company so that workers do not lose their entitlements where directors have walked out on their business. I think this is a really worthwhile step forward and I congratulate the government on this initiative.

I am quite mystified that opposition speakers should not be supporting this initiative and that they are talking about going back to the drawing board. They say that they oppose phoenix activity, yet they oppose measures to stop it. It sounds to me as if they are not genuine. It reminds me of their position on people smuggling: they say they are opposed to people smuggling yet they block efforts to stop it. It makes you wonder just how fair dinkum they are.

According to research by Veda Advantage from July 2010, phoenix companies are on the rise and the corporate remnants of the global financial crisis are back. These companies have come back in the guise of new entities and are hiding their bad credit history by starting over on a clean slate. According to the report, this news has troubled many business owners, who are now engaging in credit checks to minimise business risks with new credit partners. The statistics behind these findings show that one in every 10 directors has been linked to a company with an adverse credit history in the last six months before starting a new company. The report also found that the number of new business registrations in Australia is at its highest in over a decade. In comparison to the first quarter of 2009, the first quarter of 2010 saw the number of new business registrations up by 23 per cent. The chances are, regrettably, that if a company enters into external administration it is twice as likely to start a new company within six months, and directors of these companies can also be involved in eight or nine other companies. The research suggests that directors linked to adverse credit history are seven times more likely to default in future than those with a clean credit history. The report warns that performing a credit check on your customers and suppliers could mean the difference between survival and collapse and could afford businesses the benefit of avoiding exposing themselves to credit risks and liquidity problems in the future.

Phoenix activity has a widespread negative effect on the Australian economy, but the failure of creditors to report it to the authorities means that it often remains undetected. It costs the economy billions of dollars a year and, despite reforms over the last few years, phoenix activity remains strong. According to the Australian Taxation Office, there are about 6,000 phoenix companies in Australia and between 7,500 and 9,000 directors who would have personal liabilities under the new legislation. Tax liabilities are often left unpaid after the liquidation of a fraudulent phoenix entity. This may reflect a range of factors, including the benefit that a phoenix operator can obtain from nonpayment of the business's taxation liabilities and the fact that such an operator need not be concerned with maintaining a commercial relationship with the ATO.

While the cost of fraudulent phoenix activity is difficult to measure precisely, it is undoubtedly significant. In the past, the biggest impact on the revenue has come from phoenix companies that failed to remit accounts withheld under the pay-as-you-go system. These funds relate to the tax liability of a particular employee, and it is as if the employer holds these funds on trust. Such funds should never become part of the cash flow of a business. That is quite improper. While the benefit from the nonremission of pay-as-you-go is often derived in relation to the salary and wages of the employees of the company, particularly a labour supply company, fraudulent phoenix activity also involves directors claiming access to pay-as-you-go credits in their own personal income tax returns where the company has not remitted and will never remit such moneys to the ATO. Such actions seek to take advantage of provisions in the taxation law that allow a taxpayer to access credits for amounts withheld irrespective of whether or not those amounts have been remitted. Fraudulent phoenix operators also benefit from the nonpayment of other liabilities imposed by the taxation law. This includes superannuation guarantee payments. The nonpayment of the superannuation guarantee is a particular disgrace as, unlike other liabilities imposed under Australia's taxation laws, it will result in a direct loss to the individual employee.

Historically, fraudulent phoenix activity has been most prevalent with small business—that is, those businesses with a turnover below or around $2 million. However, the ATO has seen fraudulent phoenix activity being undertaken by much larger businesses and by individuals who already have significant levels of wealth. Fraudulent phoenix activity is also being observed by the ATO within the property development sector and was reported last year as occurring in the financial advice industry. According to a Herald Sun article of June last year:

Insolvent financial advisers and companies are reopening their businesses under a different name, just like the notorious building industry practice of using so-called 'phoenix' companies.

Dishonest financial advisers are shutting down one business and opening up a new one in an attempt to avoid defending or paying out compensation to clients who were given bad advice.

A lawyer with national legal firm Maurice Blackburn, Briohny Coglin, has said, 'Rogue financial operators who gave negligent advice to their clients are able to re-establish their business and continue to practice.' Further, she said: 'In one particular case, several clients sought compensation due to negligent financial advice but the firm claimed insolvency. The same firm re-established their business under another name and continued offering financial advice.' Adding to the problem, many financial advisers lack sufficient professional indemnity insurance to cover claims. In one case last year a company argued that it had a yearly compensation limit of $2 million and that it had almost run out. In other cases, even if the firm or adviser has enough insurance cover, their policies often exclude claims involving fraud, material nondisclosure or insolvency.

Consumer Action Law Centre chief executive Carolyn Bond said that consumers were being left high and dry. She said:

We are aware of this problem with some advisers, particularly when they have given poor advice and their business is going into liquidation.

She went on to say:

They can have all these people claiming because they've received very poor advice and lost money and unfortunately they are not able to get their money back because the company shuts down.

Clearly this is unacceptable. Consumer campaigner and Choice spokesman Christopher Zinn said that changes to financial advice laws should help shut down the problem of phoenix companies. He said:

It's a problem, like it's been a problem in other areas, but we certainly think that proposed government reforms will help.

Concern over the spread of fraudulent phoenix activity to a wider range of businesses and across more industries is also heightened by the apparent increase in the number of individuals promoting the benefits of fraudulent phoenix activity. Unions have long complained about phoenix companies, and their complaints are legitimate. Employees are frequently out of pocket because of phoenix company activity. Companies close and declare bankruptcy, leaving unpaid employee entitlements. The owner or director of the company miraculously reappears, controlling some new company conducting the same or a very similar business. I was very pleased to hear the remarks of the member for Newcastle about the question of dealing with similar companies, which is presently being considered by the government.

The ACTU has proposed reforms that would define a phoenix company; allow ASIC to ban a phoenix company from using the company or trading name that was used by the failed predecessor company; permit creditors of the failed predecessor company and persons seeking to establish that they are creditors thereof to start or continue litigation against the failed company without the leave of a court; make the phoenix company vicariously liable for the debts incurred by the failed predecessor company, allowing the Commonwealth to recover tax debts and Fair Entitlements Guarantee payments as well as provide proceeds for the types of litigation contemplated; and make the phoenix company vicariously liable in any unfair dismissal claim brought against the failed predecessor company by its former employees. Employees should be able to bring claims within 12 months of discovering that the failed company has phoenixed instead of the normal requirement that claims be brought within 14 days of dismissal. These are thoughtful suggestions that warrant serious consideration by the government.

This bill is another important piece of reform being undertaken by the Labor government to protect employees who lose their entitlements through no fault of their own when their employer enters liquidation or bankruptcy. The message to rogue directors from this bill is that the federal government and ASIC are taking phoenix activity seriously and that any director who breaches his or her duties in this regard should expect their actions to be investigated and punished accordingly. It is a very good piece of legislation, and I commend it to the House.