Corporate Law

This document provides an overview of corporate law, including the concept of the black economy and phoenixing. It discusses the estimated costs of phoenixing to the Australian economy and the industries in which it is most prevalent. The document also explores the difficulties faced by regulators in pursuing phoenix entities and the early warning signs that may assist in the early identification of phoenix activity.

RUNNING HEAD: CORPORATE LAW
Corporate Law

CORPORATE LAW
Answer 1
Meaning of Black Economy and Phoenixing
The black economy relates to individuals who work outside of the tax and regulation
scheme or who are known to the authorities but do not disclose their tax commitments
properly. It includes a broad variety of methods, including understatement of receipts,
payment and recognition of books money wages, welfare fraud, and phoenixing (where
companies intentionally liquidate to prevent paying staff and creditors). Consideration must
also be given to complex relationships with illegal operations, including money laundering.
The black economy also damages the economy and society substantially. Black economy
operations undermine confidence in the tax scheme, generate an unfair business atmosphere
that penalizes companies and people doing the correct thing, enables and reinforces
employee’s exploitation, undermines tax revenue, and enables abuse of the welfare system.1
If left unchecked, involvement in the black economy may result in a hazardous
dynamic. It can promote a culture that legitimizes this involvement and promotes it,
stimulating its further development. As revenue drop, those who remain in the formal
economy may face higher tax burdens, giving a higher motivation to move into the shadows.
Australia is not only county that is dealing with the issue of black economy but also by other
Organization for Economic Cooperation and Development Essentially (OECD) countries.
Phoenixing
The concept of phoenix operation centers widely on the idea of a second company,
often freshly integrated, resulting from the ruins of its unsuccessful predecessor where the
controllers and business of the second company are largely the same. It is essential to
remember that both phoenix exercise can be both i.e. lawful and unlawful. There is no
separate definition of phoenix is provided in the Corporation Act 2001. In general, legal
phoenix exercise includes situations where prior operators begin a comparable company if
their prior organization fails to rescue their company.2 Illegal phoenix activity exercise
includes comparable operations, but the aim is to leverage the business type to the detriment
1 Nils Gilman, Jesse Golhammer and Steven Weber, Deviant Globalisation: Black Market Economy in 21st
Century (A&C Black, 2011) 299
2 Helen Anderson, Corporate Law and the Phoenix Company in roman tosmasic (Routledge, 2017) 114
1

CORPORATE LAW
of unsecured customers, including staff and tax officials.3 Phoenix exercise can be completely
legal, particularly if the value of the property of the unsuccessful company is retained and the
staff retain their employment and rights. One defines this behavior as ' legal phoenix activity
or company rescue. However, if the returns to creditors and advantages to staff are less, the
continuous resurrection of a company can become difficult even with the best of plans.4 The
behavior becomes unlawful where the directors of the corporation intend to use the inability
of the company as a tool to prevent charging the shareholders of old company (which may
include the staff of the company) what they would otherwise have got if the property of the
company were correctly handled. Illegal Phoenixing has adverse effects on company groups,
suppliers and public through:
 Non-payment of salaries and other rights to staff and vendors,
 Achieving unfair competitive benefits
 Avoiding regulatory responsibilities.
When performed illegally, it is always preferable to be a cheap trick that leaves behind
the bonds, entitlements and navigations of the providers and staff who are essentially
interested in becoming the bright fresh business.
Phoenix activities are the concepts that are basically based on ideas of the company's or a
company's inability and often give birth to the fresh generation.
Answer 2
Estimated Costs to the Australian economy of phoenixing
According to a Pwc study published by the Australian Tax Office (ATO), the Fair
Work Ombudsman (FWO) and the Australian Securities and Investment Commission
(ASIC), a large estimate of $5 billion is being washed out of Australia's economy by
phoenixing or illegally dissolving a business.5 The research, entitled' Economic Impacts of
3 Michelle Welsh and Helen Anderson, The public Enforcement of sanctions against illegal phoenix activity:
scope rational and reform (Federal Law Review, 2016) 201
4 Helen Anderson, Ann O’Connell, Ian Ramsay, Michelle Anne Welsh and Hannah Withers, Profiling Phoenix
Activity:A new Taxonamy (2015) Company and Securities Law Journal 33(2) 133-137
5 Helen Anderson, Ann O’Connell, Ian Ramsay, Michelle Anne Welsh and Hannah Withers, Quantifying
phoenix activity:incidence, cost, enforcement (2015) U of Melbourne Legal Studies Reaserch Paper
2

CORPORATE LAW
Potential Illegal Phoenix Activity,' brings phoenixing costs between $2.8 billion and $5.1
billion annually depending on operation between 2015-2016.6 The consulting company works
further to determine the overall cost to the Australian economy, estimating a loss of GDP of
up to $3.5 billion or 0.21 percent of Australian annual GDP.
To combat the issue of phoenixing in Australia, the Treasury Laws Amendment (Combatting
Illegal Pheoxining) Bill 2019 was introduced in Parliament on 13 Feb 2019. In this bill, it was
proposed to give ASIC, ATO as well as liquidators noteworthy new powers that were
designed to help to deal with the issue of phoenix activities and to prosecute responsible
director and person who assist them in such dealings.
Answer 3
Industries in which phoenixing is most prevalent
Building industry faces a lot of phoenixing issues in Australia. According to the study
of the Senate Economic References Committee (SERC), the building company in Australia is
facing a lot of insolvency and vexed phoenixing problems. While indulging in the phoenix
operation, it is usually thought that the liquidating organization will stop paying salaries to
the employees at the same time as it gets up again. Some of the features of the construction
sector that make debt recovery very hard are the subcontracting schemes that are made up of
those vital features removed from all the significant construction projects, where the
contractor's head embarks on the agreements and receives cash from the customer or the
customer. These subcontractors are forced to state that they would pay all the arrears to all
employees under investigation and it was found that all the statements made by the builders
were false or statutory.
As in the case of Asic v Franklin 7, in the situation of Walton Constructions Pty Ltd,
some of the main concerns mentioned are as follows:
The obligations are not impartially and separately released, the builders ' issues are
not correctly defined or clarified, etc. The respondent was assigned by the construction
industry in this situation without informing them of the collapse of the company's situation.
Here it was discovered that many of the t.he employees here were engaged in collecting cash
under the table of which there was no record and this helped the illegal acts of phoenixing.
6 Philip Lipton and Abe Herzberg et all, Understanding Company Law (Thomson Reuters, 2016) 1037
7 (2014) FCAFC 85
3

CORPORATE LAW
The respondent was also pressured by the elderly to undergo the phoenixing exercise. The
high tribunal here decided or instructed their building company to be closed down.
Answer 4
Difficulties that are faced by regulators in pursuing phoenix entities
A main issue faced by regulators is the challenge in defining whether or not specific
phoenix activity is illegal or not. Illegal phoenix activity is not prone to accurate modeling, so
that a regulator can determine with assurance that it has occurred if certain designated
circumstances are present. It is almost hard to differentiate illegal phoenix activity from
integrating a previous company after a sole failure due to the lack of documentary evidence
such as written orders from advisors. Rather, the characterization of unlawful phoenix
behavior is probable to result from internal reflection over a span of moment of the behavior
of particular people engaged in various commercial failures. Directors of a company are
responsible for the proper documentation of company.
In Australia, it is basically identified that phoenix operations are mostly linked to
those individual director who are concerned in moving the property of a business encircled by
debts to the newfangled ones and then and there they become its director. Company being an
artificial person cannot run its business on its own.8 Thus, directors are the person who run
the business of the company and are responsible for all operations of company. If the director
is found engaged in phoenix activity it is said that he has violated his duty. 9
If a director is engaged in phoenix operations, he or she is probable to infringe a
number of responsibilities of directors that arise from the public law and statute. Corporations
Act 2001 (CTH) provides for various duties of director. The main duties provided by the act
is fiduciary duty and duty of skill and care.10 Directors are needed to behave bonafidely and
practice their bona fide discretion in the company's interests and to behave sincerely in what
they believe to be the company's benefits.11 In the case of Re Smith & Fawcett Ltd12, it was
stated by court that directors must act within the powers given under the charter of company
8 Bruce Cowley and Stephen Knight, Duties of board and Committee Members (Thomson Reuters, 2017) 559
9 Rosemary Teele Langford, Directors Duties Principles and Application (Federation Press, 2014) 240
10 The Corporation Act 2001, s 182,183
11 Robert Baxt, Duties and Responsibilities of Directors and Officers (Australian Institute of Company
Directors, 2015) 414
12 (1942) Ch 304
4

CORPORATE LAW
and must act in good faith. The Corporation Act provides that directors are obliged to carry
out their responsibilities in good faith, i.e. primarily for the company's benefit and for the
appropriate intent.13
It is the director's responsibility to examine all the appropriate issues posed before
them and to attempt to achieve a choice, however hard the scenario may be and directors
must not impose constraints on the tasks of the management choices to ensure that managers
are not exempt from stand-in with the organization's superior welfare.14 As per the act if the
managers ' role is misused or any of their duties are violated or the law is not carried out in
good faith or for the benefit of the organisation or misuse of any of the company's significant
data, he would be responsible to face many problems.15
In the case of Grove v Flavel16, it was considered by the court that examinations of the
freedoms and responsibilities of all employees must be carried out on the grounds of
instances and not on the grounds of uniform or inflexible norms used previously. In the case
of Mordecai v Mordecai17, the directors were held liable for breaching their duties. Further as
per the given facts the court held that the siblings had made full use of the data acquired as
the first company's managers and represented a dispute of concern and misuse of data.
The act also provides various provisions for civil and criminal liability. As per the act
director can be disqualified from administering company affairs for up to 10 years if they are
found engaged in the failure of minimum two corporations within 7 years and bad
management either solely or partially liable for the insolvency of firm.18
13 The Corporation Act 2001 s 181
14 Helen Anderson, Directors' Liability for Fraudulent Phoenix Activity—A Comparison of the Australian and
UK Approaches (2014), Journal of Corporate Law Studies 14(1) 139-173
15 The Corporation Act 2001 s 182(1)
16 (1986) 43 SASR
17 (1988) 12 ACLR 751
18 The Corporation Act 2001 s 206D
5

CORPORATE LAW
Answer 5
Sources of early warning signs that may assist in the early identification of
phoenix activity
Phoenix Task Force, headed by the ATO Australian Taxation Officers, is presently
working to identify and immediately target those who are indulged in illegal phoenix
operation in order to avoid honest companies and employees.19
Thus, the warning sign for workers that indicate the employer’s illegal participation in
the phoenix activities are as follows:20
 Firstly, if a pay slip is not received.
 Secondly, the ABN Australian Business Number and the business name
change, but the telephone number and email stay the same.
 Thirdly, delays in the payment and also less in the quantity of the minimum
wage anticipated.
 Fourthly, the employer's name is distinct from the one, which was mentioned
to the employee.
It is necessary to look very closely at the alert indications for the company holder,
which can show that the employees were engaged in the illegal phoenix operation:
 When the competitor offers a reduced quote relative to the market value.
 It is discovered that the company’s director are engaged in the liquidated
companies.
 The payment to be made is requested by another new company and finally the
changes are made to the company’s name and director, but the directors and
employees remain unchanged.
The person may go to Australian Taxation Office (ATO), Fair Work Ombudsman,
Australian Securities and Investment Commission (ASIC) etc. to get rid from these
phoenix operations.
19 Helen Anderson, Ian Ramsay, Michelle Anne Welsh and Jasper Hedges, Phoenix activity:recommendations
on detection, disruption and enforecement (2017) U of Melbourne Legal Studies Research paper
20Adressing Illegal Phoenix Activity, Australian National Audit Office (2019),
<https://www.anao.gov.au/work/performance-audit/addressing-illegal-phoenix-activity>
6

CORPORATE LAW
Answer 6
Proposals and recommendations which were identified in the report
Various recommendations and suggestions were given in the Black-Economy Taskforce Final
Report as well as in order to address the increased illegal phoenix activity in Australia
recommendations are also present in the parliament, which are as follows:21
 The government should take a range of steps to enhance the Australian Business
Number (ABN) scheme, including: prohibiting individuals from receiving ABNs on
certain visas and apprentices; ensuring regular renewal of ABNs (which would be
contingent on compliance with tax commitments); and allowing for real-time
monitoring of ABNs.
 In order to combat the danger of identification theft, it is suggested that the
government establish a scheme that enables individuals to use an electronic credential,
biometrically guaranteed to an individual's own computer or linked computer, for use
by individuals in all their relationships with government authorities.
 Where possible to share information for free about directors corporate histories.
 Improve statistical data collection on phoenix activity.
 While amending, the confidentiality needed by the statutory organizations involved in
the Phoenix task force, due thought must be provided to enabling them to reveal all
appropriate data to the ATO.
 All funds, including grants for particular budgetary reasons, must be appropriately
allocated to the state whose fundamental objective is to avoid, identify and prosecute
all illegal phoenix activity.
 Efforts must be produced to improve regulatory involvement with sector members
whose fundamental objective is to boost and improve information flow.
 All instances involving illegal phoenix activity and their activities must be clarified
and guided by the Smart Phoenix Task Force.
 Amendments shall be produced to the Corporate Law so that the courts or ASIC may
disqualify managers if the individual is or has been the manager of a failed business
and the individual has behaved in a manner that makes them unsuitable to handle the
business.
21 Australasian Legal Information Institute, Corporations Act 2001 (2019)
<http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/>
7

CORPORATE LAW
 The Government considers the establishment of an injunction system to allow judges
to freeze the property of a directors where the company has a fair claim prima facie.
 That ASIC consider setting up a hotline and strategically locating staff to facilitate
early identification and/or avoidance of phoenix operation.
Thus, abovementioned were some of the recommendations made in the report.
In order to avoid illegal phoenix activity directors must take into consideration mainly
four major steps. They've already managed the company's entire responsibility but
couldn't cover the bills. The insolvent firm is then handed over to internal administrators.
The licensed liquidators are to understand the company's property and compensate the
creditors and staff for the liquidation expenses. Then, finally, the directors can start a
fresh company. 22
The above suggestions can contribute to a very powerful side in assisting the commercial
company and preventing them from turning to illegality. Illegal phoenix activity hinders a
nation's economy, so it needs to be prevented to a big extent. It will also offer rise to a
black economy that decreases a nation's growth on a big scale.
22 Mathew Harding and Miranda Stewart, Not for Profit Law: Theoritical Perspective (Cambridge University
Press, 2014) 396
8

CORPORATE LAW
Work Cited
A- Books/Articles/Journal
Anderson, Helen, Ann O’Connell, Ian Ramsay, Michelle Anne Welsh and Hannah
Withers, Profiling Phoenix Activity:A new Taxonamy (2015) Company and
Securities Law Journal 33(2) 133-137
Anderson, Helen, Corporate Law and the Phoenix Company in roman tosmasic
(Routledge, 2017)
Anderson, Helen, Directors' Liability for Fraudulent Phoenix Activity—A
Comparison of the Australian and UK Approaches (2014), Journal of Corporate Law
Studies 14(1) 139-173
Anderson, Helen, Ian Ramsay, Michelle Anne Welsh and Jasper Hedges, Phoenix
activity:recommendations on detection, disruption and enforecement (2017) U of
Melbourne Legal Studies Research paper
Baxt, Robert, Duties and Responsibilities of Directors and Officers (Australian
Institute of Company Directors, 2015) 414
Cowley, Bruce and Stephen Knight, Duties of board and Committee Members
(Thomson Reuters, 2017)
Gilman,Nills, Jesse Golhammer and Steven Weber, Deviant Globalisation: Black
Market Economy in 21st Century (A&C Black, 2011)
Harding, Mathew and Miranda Stewart, Not for Profit Law: Theoritical Perspective
(Cambridge University Press, 2014) 396
Lipton, Philip and Abe Herzberg et all, Understanding Company Law (Thomson
Reuters, 2016)
Teele, Rosemary Langford, Directors Duties Principles and Application (Federation
Press, 2014)
Welsh, Michelle and Helen Anderson, The public Enforcement of sanctions against
illegal phoenix activity: scope rational and reform (Federal Law Review, 2016) 201
B- Cases
Grove v Flavel (1986) 43 SASR
Mordecai v Mordecai (1988) 12 ACLR 751
Re Smith & Fawcett Ltd (1942) Ch 304
9

CORPORATE LAW
C- Legislations
The Corporation Act 2001
D- Websites
Addressing Illegal Phoenix Activity, Australian National Audit Office (2019),
<https://www.anao.gov.au/work/performance-audit/addressing-illegal-phoenix-
activity>
Australasian Legal Information Institute, Corporations Act 2001 (2019)
<http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/>
10