The Black Economy and Phoenixing Practices

This article discusses the black economy and phoenixing practices, which are illegal activities hindering the growth and development of the country along with the violations of business ethics and political obligations of the people including tax and other provisions. The article also provides recommendations to curb these practices.

Running Head: CORPORATE LAW
THE BLACK ECONOMY
Name of the Student
Name of the University
Author’s Note

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The black economy means the type of people who work entirely beyond the system of tax
and regulatory and they are known to the concerned authorities but do not lawfully fulfill their
tax obligations. In other words, practices including understatement of takings, welfare fraud,
sharing economy contractors and not announcing their earnings, moonlighting and phoenixing
constitute the black economy. Activities involving complex interactions with the underground
economy including illegal activities and money laundering also constitute the black economy. In
other words, phoenixing and black economy are the degradation processes of the economy. The
black economy is explained as a whole process of avoiding of tax obligations by the concerned
authorities whereas the practice of phoenixing is a part of the black economy related solely to the
corporations being unlawfully dissolved by its promoters and directors for the avoidance of dues
of creditors and employee entitlements and creating anew company with zero liabilities for such
payments, continuing the process and business of the previously dissolved company. Such
practices are the illegal activities performed by the people for their own advantage, cornering the
benefits of the other people including the government and the essential services required for the
benefit of the country as a whole. Therefore, the black economy as well as the phoenixing
practices are both illegal and unlawful practices hindering the growth and development of the
country along with the violations of business ethics and political obligations of the people
including tax and other provisions.
The black economy underestimates the integrity of Australia’s tax and welfare system
and the honest tax payers are the ones who are penalized. If these activities are allowed to be
continued without check, it can lead to fostering of culture which shall be in complete
participation of the act leading to falling of revenues, tax burdens on other common people with

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lure of higher incentive in these activities. In 2012, Australian Bureau of Statistics estimated that
the cash economy amounted to 1.5% of Australia’s Gross Domestic Product.
While the black economy is deeply embedded in the system, it is still a long standing
problem creating fundamental economic, social and technological changes. This means that the
black economy is deeply rooted within the system and hence, it is a problem of the country as a
whole. Therefore, these problems result in the inefficiency of the changes to be brought in the
aspects of social, economic, business and the technological changes resulting in the deficiency of
services in the essential service streams like hospitals, social aid programs, and so on.
Phoenixing is the activity where the company is deliberately liquidated to avoid payment
to its employees and staff along with its debts, taxes, and creditors. After the liquidation of the
former company, a new company is created to continue the businesses and activities of the
former company without any liabilities related to the former company. In other words,
phoenixing is the process by which the promoters and directors of one company dissolve such
company after the dues of the creditors, employee entitlements including superannuation, and the
non-delivery of goods and services accrues and a new company id subsequently incorporated by
the same promoters and directors under their own names or third party individuals as dummy
individuals, for the purpose of carrying out similar business activities. Such an act is considered
both unlawful as well as illegal activity. Such an act affects business community, employees,
contractors, government and other through :
 Non-payment of employee entitlements.
 Unfair advantage over the competitors.
 Non-payment of the suppliers.

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 Loss of government revenue and increased expenditure on the enforcement activities.
 Non-compliance of regulatory obligations.
The activity of phoenixing affects all the people within its parameters. Such activities
launders money into personal funds resulting in the deprivation of funds from essential services
like hospitals, roads, education and other essential services. However, such activities should be
identified and offenders should be prosecuted to the full applicability of law.
In a report published in June 2012 by PwC, the total cost excluding the unpaid
Superannuation was approximately 1.79$ billion to 3.19$ billion every year. However, the report
further details the annual cost of unpaid wages and employee entitlements amounting to 655$
billion, result of phoenix companies failing to pay debts or non-delivery of goods and services
amounting to 1.93$ billion, and 610$ billion for unpaid taxes under government revenue.
The Cole Royal Commission has found out that there is a drastic and significant practice
of phoenixing in the building and construction industry. Significant incidents can be seen in the
eastern states. The Commission has explained following factors responsible for the Building and
Construction Industry’s vulnerability into the phoenixing activity:
 The work is based on projects.
 Competition and its pressure.
 Problems related to the flow of cash.
 Lack of administrative skills.
 Contractors have a limited base for assets.
Virtually, it is impossible to identify a phoenix company from the successor company.
However, the characteristics of the phoenix company is observed from the external conduct of

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the individuals involved in varied corporate failures over a period of time. This means that the
internal conducts of the company is difficult for the identification of the fraudulent activities.
However, the external conducts are always under the monitoring of the authority and the
concerned board, and therefore, they are easier to assess and identify the phoenixing practices of
trade and taking necessary actions for the same.
According to Anderson et al. (2014), incorporation and registration of companies in
ASIC or the ATO makes it relatively easier to identify such situations because the name of the
controller of the failed company is seen in the documents for the incorporation of new company.
Therefore, in order to identify the illegal phoenixing of companies, the name of the controller
forms an important guideline. However, the identification becomes more difficult where the
names of the company are changed or the dummy individuals replace the position of
directorship. The promoters of the company are well-versed with the provisions related with such
practices and hence, they have incorporated a new idea of dummy representatives of the original
peoples. In other words, it can be explained that the promoters and the directors of the former
company appoint third parties called the dummy individuals whose job is only to be positioned
on such designations as per the requirements of the documents for the registration of the new
company camouflaging the original people or the controlling minds behind the business activities
of such companies. It is difficult to identify the controlling mi9nds behind such dummy
individuals because the names of the persons on the documents are different with that of the
former company and hence, the identification of phoenixing practice becomes difficult and more
intense in terms of identification and proof.
According to “Illegal phoenix activity | ASIC - Australian Securities and Investments
Commission", 2019, the warning signs of illegal phoenix may include following:

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 Failure of company and non-payment of debts.
 The name of the company id changed to its Australian Company Number and
subsequently, registration of a new company, general with certain similarities with the
name of the old company.
 The directors or the former directors of the company have transferred the assets of the
previously existing company to the newly incorporated one for the amount less than the
market share.
 The new company is involved in the similar business as the previous dissolved company,
sometimes from the same premises with the usage of same assets.
 The newly incorporated company uses the bank accounts, advertising agency and
materials and other details with that of the old company.
 The people of the earlier company hold the positions in the new company may be as
directors or controllers. In short, the management remains the same.
The warning signs of phoenix activities are such that the activities have been identified
deterrently by the concerned authority and the same has been identified for the reporting of such
activities. The transfer of assets, similar names of the controllers and the promoters, usage of
similar bank accounts, advertising materials and other details, and most importantly, the transfer
of assets at the rate lesser than the market price ensures such fraudulent activity. The transfer of
shares and assets at the rate lesser than the market price ensures that the other new company that
is acquiring the assets of the old company is the result of the fraudulently dissolution of the
former company for avoiding the payments accrued towards its creditors, the suppliers, including
the non-delivery of goods and services and the employee entitlements including superannuation.

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Thus, there are two aspects to the understanding of phoenix activity. Firstly, the legal
aspect where one party is allowed to dissolve the company and create a new one, in accordance
with the requirements and the terms of the law. Secondly, the illegal aspect where the company
is dissolved to avoid the payment of the employees and their entitlements and the clearance of
the debts towards the creditors and a new company is created for the carrying out the businesses
of the dissolved company. Every time a company bequeaths debts and the employee entitlements
become due, the company is dissolved to avoid payments and a new company is created to carry
on the businesses of the dissolved company. According to Anderson et al. (2014), incorporation
and registration of companies in ASIC or the ATO makes it relatively easier to identify such
situations because the name of the controller of the failed company is seen in the documents for
the incorporation of new company. Therefore, in order to identify the illegal phoenixing of
companies, the name of the controller forms an important guideline. However, the identification
becomes more difficult where the names of the company are changed or the dummy individuals
replace the position of directorship
The Report has set out set of recommendations. The sixth recommendation lays down the
requirement for the tougher and more visible enforcement. This means that new and strengthened
policies against phoenixing of activities shall be implemented including the terms for penalties
which shall be strict and deterrent to curb the unfair practices. The policies shall extend its scope
to various other shams, including ABN fraud, sham contracts and illegal tobacco trade. High
Profile prosecutions shall have more visibility and efficient litigations to bring such scams in
light so that the practice is curbed with the fear of public insult. In addition, the report also
recommends fewer confidential settlements. These settlements are meant to decrease the number
of litigations in the case. However, such parties have undermined the benefit of settlement as the

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avoidance of liability. In other words, the parties shall be brought to limelight to ensure public
knowledge and insult to their scam so that the fear instilled in them shall curb the practice of
unfair trade and phoenixing. To ensure the achievements of such recommendation, the
Government should apply TPRS system to enhance the third-party system available to Australian
Taxation Office to further high-risk industries. It aims to enhance Australia’s Taxation Office’s
visibility of the contractors’ incomes involved in high-risk industries through subsequently
expanding the TPRS System to such industries. Moreover, it aims to the creation of equality in
the reporting of the payment of employee entitlements and those of the contractors. Further, the
recommendation extends to a sharing economy regime. This means that the operators websites
should be required to report payments made to their users. This means that the Government shall
raise public awareness about the tax obligations from participation in sharing economy activities.
This aims to ensure that public should be made aware about their tax obligations driving
voluntary compliance. This means that new and strengthened policies against phoenixing of
activities shall be implemented including the terms for penalties which shall be strict and
deterrent to curb the unfair practices. It can be explained that the recommendation six as a whole
demands for a tougher way of monitoring of such practices and also, creating public awareness
about the rights and duties pertaining to both the employer and the employee including that of
the supplier and that of the receiver of the goods and services to avoid any parity among such
people.
In recommendation sixteen, the report has laid down the policy requirement for tougher
and better targeted penalties for the promoters involved in such unfair practices. Moreover, the
recommendation also states requirement for better early detection or identification of such
activities and subsequently taking enforceable actions primarily being asset clawbacks. The

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Government recommends an advisory board inclusive of both public and private sector
representatives. This is done so to ensure accountability of emerging trends and risks associated
with the black economy and preparation of five year report on such matters. The
recommendation further extends to the creation of a standing Taskforce for the identification and
response to and prosecution of serious and complex black economy fraudulent activities.
Moreover, the report recommends for the establishment of Office of Black economy
Ombudsman and hotline associated with these services.
It can be concluded that the economy of a country rises and falls with the practices
embedded within its system and trade. The practices are complex and monetary related and
hence, creates a sense of selfishness among the people with the objective of profit maximization.
These objectives lead to the illegal practices of black economy and phoenixing impacting the
country as whole leading to the devastation of people and their revenues including the essential
services of the country. The essential services can be explained as the revenue that could have
been funded for the development of the hospitals, schools, health care facilities and so on have
been lost to the hands of such sham activities leading to the fulfilment of their personal aims and
objectives. Therefore, Government aims to take effective steps for the curbing of these activities
by the application of various stringent rules and establishment of Ombudsman Office along with
public awareness. The report is the outcome of complete assessment of the problem of such
practices and the steps to be taken by the Government for curbing of these practices. However,
the other aspect of such practice is legal phoenixing of company meaning that if the company
genuinely goes into a state of bankruptcy, and the promoters have no money to pay the dues,
then such company is dissolved and such practice is called legal phoenixing. Thus, as every coin
has two sides, the true assessment of the reasons behind the company dissolution and the steps

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taken to evolve from such vicious cycle should be grasped with the intention of the promoters
and the directors behind such dissolution.

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References:
(2019). Retrieved 18 August 2019, from https://treasury.gov.au/sites/default/files/2019-03/Black-
Economy-Taskforce_Final-Report.pdf
Anderson, H. (2014). Directors' Liability for Fraudulent Phoenix Activity—A Comparison of the
Australian and UK Approaches. Journal of Corporate Law Studies, 14(1), 139-173.
Anderson, H. L., O'Connell, A., Ramsay, I., Welsh, M. A., & Withers, H. (2014). Defining and
profiling phoenix activity. Available at SSRN 2536248.
Australian Bureau of Statistics (ABS), The non-observed economy and Australia’s GDP,
2012: information paper, cat. no. 5204.0.55.008, ABS, Canberra, 12 September
2013.
Coggins, J., Teng, B., & Rameezdeen, R. (2016). Construction insolvency in Australia: reining in
the beast. Construction Economics and Building, 16(3), 38-56.
Fair Work Ombudsman, Phoenix Activity: Sizing the Problem and Matching
Solutions (prepared by PricewaterhouseCoopers, June 2012), pp. 2, 15. Cited in
ATO, Submission 5, p. 12.
Final Report of the Royal Commission into the Building and Construction Industry: Volume
8 Reform—National Issues Part 2 (2003), p. 161.
Grigonis-Gore, J., Brazenall, G., & Ho, J. Illegal phoenix activity within Australia: An analysis
of the legal and ethical issues.

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Illegal phoenix activity | ASIC - Australian Securities and Investments Commission. (2019).
Retrieved 18 August 2019, from https://asic.gov.au/for-business/small-business/closing-a-
small-business/illegal-phoenix-activity/
Illegal phoenix activity. (2019). Retrieved 18 August 2019, from https://www.ato.gov.au/General/The-fight-
against-tax-crime/Our-focus/Illegal-phoenix-activity/
Petschler, L. (2017). Advocacy: Phoenixing in the spotlight. Company Director, 33(3), 45.
What is the black economy? | Treasury.gov.au. (2019). Retrieved 16 August 2019, from
https://treasury.gov.au/review/black-economy-taskforce/what-is-the-black-economy