In an effort to crack down on phoenix companies that are stripped of assets and liquidated, only to pop up again under another name, leaving creditors out of pocket, the government is planning to bring in tough new laws that will give all company directors a director identification number.

ID numbers to allow tracking of director activities

Directors of Australian companies will be given a unique ID number that will allow authorities to track the activities of individual directors through various government databases and trace their connections to other directors and companies.

The government is consulting on the best way to introduce tougher regulations to combat the growing illegal scourge of "phoenixing" that is estimated to cost the Australian economy $3.2 billion a year.

Minister for Revenue and Financial Services Kelly O'Dwyer said that under proposed new company director rules, directors suspected of being involved in phoenixing might be forced to provide a security deposit that could be used to recover future unpaid debts. Directors could also be made personally liable for GST liabilities.

Dummy directors installed to shield real directors

Organisers of the phoenix operations are reported to manipulate the corporate system by installing dummy directors in companies to shield the real directors, who cheat creditors and the tax office. In some cases the dummy directors don't even know they have been listed by the phoenix operator as company directors.

One such organiser of phoenix operations was recently hit with a personal tax bill of $8.5 million after allegedly advising clients how to put companies into liquidation. (See Deputy Commissioner of Taxation v Whiteman [2017] FCA 951.)

Danger of harming businesses by introducing excessive red tape

I welcome the crackdown on crooked phoenix operators who steal money from their workers and contractors. But the government must be careful that the extra red tape doesn't adversely affect honest businesses.

I know of many good, hard working small businesses that have suffered at the hands of phoenix operators who declare themselves bust so they don't have to pay their bills, and then the same people appear under another company name to do it all over again.

These operators should be driven from every industry, and there has been some successful legal action, with ASIC banning some directors from managing companies for a number of years.

But the danger of bringing in yet more time consuming red tape is that some directors and company managers might inadvertently get caught up in the complex paperwork, particularly when there are already so many rules and regulations applying to directors.

It is vital that company directors seek expert advice in commercial law to keep abreast of changes, stay within the law and minimise risk.

Michael McHugh
Directors' duties
Stacks Law Firm

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