Understanding the Black Economy and Phoenixing in Corporate Law

This document provides an in-depth analysis of the black economy and phoenixing in corporate law. It explains the concept of the black economy, its characteristics, and activities contributing to it. It also discusses the impact of phoenixing on the economy, particularly in Australia, and the losses incurred by the government, businesses, and employees. The document further explores the prevalence of phoenixing in the building and construction industry and the challenges faced by regulatory agencies in combating this issue. It concludes with recommendations to address illegal phoenix activity and improve debt recovery.

Running Head: Corporate Law 5915 0
Corporate Law 5915
9/7/2019
Student’s Name

Corporate Law 5915
1
Contents
Question 1........................................................................................................................................1
Question 2........................................................................................................................................2
Question 3........................................................................................................................................3
Question 4........................................................................................................................................4
Question 5........................................................................................................................................6
Question 6........................................................................................................................................6
References........................................................................................................................................9

Corporate Law 5915
2
Question 1
The black economy can be understood as those people whom authorities know but are
completely out of tax and regulatory system and do not fulfill their tax obligations properly
(Emery, 2018). Such economy refers to untaxable business transactions that nowhere reflect in
the gross domestic product of companies. In other words, this can be stated that the black
economy is a cash-based system where transaction used to record in different accounting books,
generally known as "number two" accounts. It promotes the use of black money that goes hand
in hand. Here this is to inform that some people have also known black economy as underground
economy, shadow economy and the cash economy (Marketbusinessnews, 2019). Different
activities are there which further contributes to the black economy and these includes not
mentioning the acceptance and payment of cash wages in the accounting books, phoenixing,
moonlighting, welfare fraud and so on. In addition to these authorities, money laundering can
also be treated as an activity contributing to the black economy (Treasury, 2019a).
If to understand the meaning of this economy in detail, this is to state that the same has
three characteristics. Firstly, some of its aspects are illegal. For instance, it may include some
goods or services, which are illegal to deal or provide. Secondly, people generally preferred cash
under this economy. Lastly, it involves money laundering to convert illegal payments to a
legitimate form. This kind of economy badly affects the GDP of the nation and overall economic
growth of the same as it prevents taxes from going into the account of government and disturbs
the whole economy while promoting illegal payments and receipts (Amadeo, 2019).
Phoenixing: - This is another term of the black economy. This is a process where people
incorporate the new company that carries the business of old firm which has been wound up to

Corporate Law 5915
3
avoid tax and other liability (McCouat, 2010). In other words, this is to state that Phoenixing can
be understood as an activity where a firm deliberately reduces its business operations and goes
out of business with the intention to avoid meeting its obligations to customers, government, and
employees. Nevertheless, the same intend to reappear in another guise soon. Usually, big firms
do such activities as they have greater obligations in comparison to small firms. This activity is
usually illegal because of owners of business transfer assets of the old firm to the new one on
unfair market values and leaves debts and other obligation of the old company (Wolters Kluwer,
2019). Different parties are involved in setting up a phoenix company. These parties generally
involve pre-insolvency adviser, dummy directors, valuer, phoenix operators, and liquidators
(Asic, 2019). Here this is required to inform that in addition to illegal phoenix companies, legal
phoenix companies are also there. It means if directors of business try their best to manage one
company genuinely but fail to do so then in such a situation the same can transfer the business of
the old firm to a new company without being engaged in illegal activities. In recent times, a
massive increase in phoenixing has been seen.
Question 2
In Australia, the issue of Phoenixing is increasing day-by-day and bringing adverse
impact to the whole economy of the nation. If to discuss the losses that Phoenixing brings to
Australian economy, this is to state that as per PricewaterhouseCoopers (PwC), the Fair Work
Ombudsman (FWO) and Black economy taskforce the estimated cost of phoenix activity to is
between $1.8 to $3.3 billion annually to government revenue, businesses, and employees.
These losses contain unpaid employees entitlements for instance redundancy pay, unpaid
Salaries, and wages. In conjunction with this, the losses also include unpaid debts to other

Corporate Law 5915
4
businesses such as suppliers and unpaid taxes. In 2018, the federal government's taskforce
against phoenix activity in business revealed that the subjective cost is likely to increase over $5
billion per year. In addition to this, the government is estimated to lose $1.66 billion in the form
of unpaid tax annually. Further employees are likely to a loss of $298 million annually in the
form of unpaid superannuation and wages (Powell, 2018).
Question 3
In general, every industry of Australia is facing issues related to phoenixing and its
dangerous consequences; furthermore, building and construction industry is the one where such
practices are most prevalent. Over the past few years, the industry found doing contribution by 8-
10% in the total GDP of Australia as well as to employment too (Chesterman, 2018).
Nevertheless, over the same period, this industry also found accounted for between one-fifth and
one-quarter of total insolvency of the nation. Businesses of the subjective industry are failing to
repay their obligation and therefore closing down their operations. Nevertheless, they do not
close the operations permanently and restart the same under the name of different firm/company.
The reason behind the same is tax plays an important and major role in this industry. Clients, as
well as companies, estimate whether a contract will be profitable or not based on tax involved in
the transactions. One another important reason behind the high level of Phoenixing in this
industry is sub-contracting. In general, contractors further divided their work among sub-
contractors. Here to get the reimbursement of charges from the head contractor, these sub-
contractors are required to make a certain statutory declaration that proves that they have made
payment to labor as well as to other debts (Anderson, 2015). This is the reason that this industry
involves the use of a false statutory declaration at a very higher rate. Cases related to the
recovery of unpaid wages also been fraught. Employees do not have an idea about the company

Corporate Law 5915
5
from where they are getting their wages and in such a situation, change of name becomes even
easier for business. Another industry where the issue exists in a significant volume is labor-
hiring industry (Australian Government, 2009). The reason for Phoenixing in this industry is the
same that is minimal knowledge of employees and workers with respect to their employment.
Question 4
Over the decades, regulatory agencies are making continuous efforts to prevent
phoenixing activities but the issue continues. There are many difficulties that these agencies have
faced in the past and are still facing. The very first difficulty is the identification of directors as
well as other associates. These also include controlling minds that may be involved in more than
one phoenixing companies. In other words, this is to state that to combat phoenixing there is
always a requirement of identification of true controlling powers working behind a business. At
many of the times, such powers do not exist with directors and for this reasons, regulatory
agencies are required to look at the management contracts, agency contract, contracts of power
of attorney and another similar kind of instruments. By having a lookup to these documents, they
may check who are real controlling minds of a business/company. This is a time taking process,
which also includes a lot of efforts. In addition to this, sometimes, authorities also need to check
signatories of bank accounts of business and payee to the business debts to check the controlling
hands and minds of business.
Here this is to mention that identification of these directors as well as controlling minds
are required to make them held liable. If no identification will be there, agencies will not be able
to understand to whom they are required to held them liable. One person may be a director in
more than one companies and such a situation, it is expected that he/she would do similar

Corporate Law 5915
6
activities in other companies too. People pursue activities like Phoenixing and not the companies
themselves. Director and controlling brains of the business takes decisions on behalf of the
business. They run the business and take all the financial and operating decision hence plays
crucial roles. This is the reason that to combat phoenix entities, such identification is necessary.
Another major issue, which these authorities often face, is a lack of coordination between
various agencies. If to discuss the current situation, this is to state that various agencies such as
Australian Tax officer and Australian Securities and Investments Commission operate some
system, which gives the public an option to raise the issues related to illegal phoenix activity. In
such a situation, many of the times, information of a phoenix operator submitted to one agency
does not match with the information of other agency. This creates confusion and again consumes
the time of agencies.
Further due to the current regime of notice of appointment and resignation of directors,
ASIC cannot timely check and ensure that how many and which directors are there at a particular
time in a company as no prior notice of resignation of a director is required to be lodged with
ASIC. At least one director who is resident of Australia is required to be appointed as a director
in a proprietary company. A director may leave the company by simply submit the resignation
letter to the company and approval of the company is not required in it. Many of the time,
directors claim that they have submitted their resignation to the company on time but it was the
company that delayed in submitting the same to ASIC. In such a situation, regulatory agencies
fail to identify the entities as well as to their controlling minds and cannot take necessary actions
on time.

Corporate Law 5915
7
Question 5
It has been seen that early identification of phoenix activities can be a good option to
reduce such activities. Now the issue arises regarding the manner in which such identification
can be made. This is to state that certain sources and early warning signs may be used for the
same. Such early warning system may be developed using information from the public as well as
private sectors such as better data sharing and enhanced suspicious matter reporting. Financial
institutions may work as one of the significant sources as they know suspicious matter
transaction. These transactions may be used as early warning signs. On the other side, banks are
other important sources. At the time of funding of secured loans, banks create charges or
mortgages over assets. Whenever a shifting in assets placed, banks come to know about it at first
instance. Such assets shifting are a crucial sign of phoenix activities and may assist in the early
identification of phoenix activity (Treasury, 2017b, 228). In conjunction with this, trade unions,
credit-reporting agencies, insolvency industry experts are some other sources, which may
provide subjective warning signs as they have information with respect to high-risk phoenix
operators. These sources do not only have information related to potentially high-risk companies
but they are also eligible to provide information related to directors. Further introduction of
single touch payroll are also eligible to give earlier information, for instance, the system may be
used to check whether any superannuation entitlements are pending or not. This can include
increased suspicious matter and can provide a warning to AUSTRAC.
Question 6

Corporate Law 5915
8
After the above-mentioned discussion, it is far clear that the level of illegal phoenix
activity is quite high and in Australia and it is disturbing the whole economy. The final report
produced by the black economy taskforce has identified certain recommendations that can be
used to address the issue of illegal phoenix activity. These recommendations are mentioned
under point number 10.1 of the report and are four in total (Treasury, 2017C, 226). The first very
recommendation has already been discussed in this report under the answer to question 5. The
recommendation states that government agencies should use early warning signs from private
and public sectors and should prevent happening of phoenix activities. Under this
recommendation, agencies check the company, which can be engaged in such activities in the
future and takes action against them. The second recommendation states that the promoter
penalty regime should be extended to controlling minds. It means penalties must be there for the
people who control the company in actual and not only for ones that hold some position. At
present people do not hold a position in companies but plays an important role in controlling the
affairs. Agencies cannot impose penalties on them as their name does not mention in records.
The third recommendation states that there must be Potential new offenses with respect to the
identification number of proposed directors. The last recommendation develops its focus on the
recovery of debts and states that there must be an improvement to the Asset less Administration
Fund. In addition to this, this also states that there must be the formation of an insolvency
advisory panel. The recommendation demands that agencies and regulators such as ASIC,
AUSTRAC, ATO should have greater expertise and must closely observe the doubtful activities
of high-risk companies and directors such as nonpayment of wages and superannuation.
At first instance, these recommendations seem to be very effective but in actual certain
issues are associated with them that question the subjective effectiveness. For instance, in the

Corporate Law 5915
9
very first recommendation, coordination seems to be a very genuine issue. Collection of warning
signs from different sources does not seem a practical thing to do. Information can be collected
from public sources once but when it would be about private sources, they are not likely to share
information related to their clients. Private institutions often have their policy and code of
conduct according to that they are required to keep the information of their clients confidential.
Sharing such information with authorities can bring issues of a confidentiality breach. Secondly,
such sources cannot be treated as confidential. Wrong information about suspected activities can
waste time and efforts of authorities. Issues are also there with the second recommendation,
which says that penalties must also be imposed on controlling minds. Now the issue would come
in respect to the identification of controlling minds. It would be hard for the authorities to check
and justify whether a person can be treated as controlling the mind or not. If to discuss the third
recommendation, this is to state that the same seems to be effective, nevertheless, issues can be
there in some exceptional circumstance where a person holds more than one DIN. In a smear
manner, forth recommendation would also require greater efforts of authorities. However, the
same seems to be effective as it involves support of the extension of the scope of the Asset less
Administration Fund for better support of courts and liquidators. Further, the recommendation
also addresses the situation where phoenix activities are already there. Conclusively, this is to
state that some issues seem to be associated with these recommendations but the same can be
resolved by the time. Considering the present situations, these recommendations can be
implemented and issues can be resolved later on if any would be there.

Corporate Law 5915
10
References
Amadeo, K. (2019). The Black Economy and Its Impact. Retrieved from:
https://www.thebalance.com/black-economy-4173517
Anderson, H. (2015). Is illegal phoenix activity rife among construction companies? Retrieved
from: https://theconversation.com/is-illegal-phoenix-activity-rife-among-construction-
companies-43111
Asic (2019). Illegal phoenix activity. Retrieved from: https://asic.gov.au/for-business/small-
business/closing-a-small-business/illegal-phoenix-activity/
Australian Government. (2009). Action against fraudulent phoenix activity. Retrieved from:
http://archive.treasury.gov.au/documents/1647/PDF/Phoenix_Proposal_Paper.pdf
Chesterman, M. (2018). Insolvency in the building and construction industry. New thinking. Old
problem. Retrieved from: https://helix.legal/insight/insolvency-in-the-building-and-
construction-industry-new-thinking-old-problem/
Emery, J. (2018). Budget Forum 2018: Targeting the Black Economy. Retrieved from:
https://www.austaxpolicy.com/budget-forum-2018-targeting-black-economy/
Marketbusinessnews. (2019). Shadow Economy – Definition And Meaning. Retrieved from:
https://marketbusinessnews.com/financial-glossary/shadow-economy-definition-
meaning/
McCouat, P. (2010). Australian Master GST Guide, 2011, 12th ed. Australia: CCH Australia
Limited.

Corporate Law 5915
11
Powell, D. (2018). Government establishes phoenix activity hotline as the cost to the economy
each year hits $5 billion. Retrieved from: https://www.smartcompany.com.au/business-
advice/legal/government-establishes-phoenix-activity-hotline-as-cost-to-the-economy-
each-year-hits-5-billion/
Treasury. (2017b). Final Report. Retrieved from: https://treasury.gov.au/sites/default/files/2019-
03/Black-Economy-Taskforce_Final-Report.pdf
Treasury. (2017c). Final Report. Retrieved from: https://treasury.gov.au/sites/default/files/2019-
03/Black-Economy-Taskforce_Final-Report.pdf
Treasury. (2019a). What is the black economy? Retrieved from:
https://treasury.gov.au/review/black-economy-taskforce/what-is-the-black-economy
Wolters Kluwer. (2019). Information Sheet 212: Concerns About Illegal Phoenix Activity.
Retrieved from:
https://iknow.cch.com.au/document/atagUio2647832sl682117162/information-sheet-212-
concerns-about-illegal-phoenix-activity