BULAW5915 Corporate Law Assignment: Phoenixing and Regulation

This report analyzes the issue of phoenixing within the context of Australian corporate law. It begins by defining the black economy and phoenixing, outlining different types of black economy activities and the negative impacts of illegal phoenixing, including non-payment of wages and unfair advantages. The report then estimates the economic impact of phoenixing in Australia, citing a PwC report that estimates billions are lost annually due to phoenix activity. The report also discusses the construction industry, a sector particularly vulnerable to phoenixing, and the difficulties regulators face in pursuing phoenix activity, including the challenges in holding directors accountable for their actions. The report also examines the duties of directors and the early warning signs of phoenix activity, and concludes with proposals and recommendations to combat illegal phoenixing. This assignment is based on the assignment brief for the BULAW5915 Corporate Law course at Federation University, Australia.

CORPORATE LAW
AUSTRALIA
Running Head: BUSINESS LAW 0

BUSINESS LAW 1
Table of Contents
Question 1.......................................................................................................................................1
Black Economy...........................................................................................................................1
Phoenix........................................................................................................................................2
Question 2.......................................................................................................................................3
Estimation of phoenixing in Australian Economy..................................................................3
Question 3.......................................................................................................................................4
Widespread of phoenixing in Australia...................................................................................4
Question 4.......................................................................................................................................5
Difficulties faced by the regulators in pursuing phoenix activity..........................................5
Question 5.......................................................................................................................................7
Sources of early warning signs which may assist in identification of phoenix activity.......7
Question 6.......................................................................................................................................8
Proposals and recommendations..............................................................................................8

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Question 1
Black Economy
It is that part or activity of the economy of nation which is attained from those sources
which is found against the laws and rules of that country in relation with the commerce. The
legality and illegality of these activities depend upon the services involved in it. Mostly people
gets into these types of activities just for avoiding and controlling the taxes and other
regulations1. Black markets arises basically when the restrictions are imposed by the Government
upon certain goods or services or by declaring those transactions illegal or prohibiting them.
One of its best example is, the under the table payment done to a construction worker will
not make him liable for paying any taxes of his earnings. Here also the work of construction is
legal and it is that under the table payment or nonpayment of taxes which becomes the
unfortunate part of black economy2.
Generally black economy can be classified into four types and those are
 The illegal economy is consisted of that income which is generated by the activities
which breaches the legislation of the state in relation to the commerce.
 The unreported economy, here the rules established by the institution are escaped for
example rules mentioned in the tax code.
 The unrecorded economy are those activities which are not at all mentioned in any
statistical agencies.
1 Kimberly Amadeo, The Black Economy and Its Impact (2019) <https://www.thebalance.com/black-economy-
4173517>.
2 Joseph Ayoub, Targeting the black economy (2018-19)
<https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/
BudgetReview201819/TargetingBlackEconomy>.

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 The casual economy is comprised of those acts which can be differentiated from those
which provides benefits and rights in the administration in relation to the commercial
activities.
According to the report of the black economy taskforce 2017 the black economy was defined
as the very complex and divergent way in which the social and economic problems are
growing3.
Phoenix
Phoenix is the term which is named after a very unique bird who lived for five to six
centuries in the desert of Arab and also generated a new youth from the ashes to continue with
the cycle even after burning itself on the funeral pyre4. So the use of this term in the corporation
may be in a way that, Phoenixing is considered that activity which is illegal in nature and at this
time the newly framed companies tend to work for those companies which are intentionally not
paying off taxes and other debts of the creditors and employees5. The illegal Phoenixing throws
negative impact on the communities of business, contractors and the government through
 Nonpayment of wages and other entitlements to the employees and also the suppliers:
 Attaining unfair advantages from the competitors:
 Avoiding the regulatory duties etc.
In the recent years the Phoenixing has become a burning phenomenon basically in Australia
due to 2 reasons namely,
 Growth in the number of insolvent advisors who can recommend it:
 Due to cheapness of the advisors.
3 Attribution #.0 Australia, Black Economy Taskforce: Final Report, 2017,
https://static.treasury.gov.au/uploads/sites/1/2018/05/Black-Economy-Taskforce_Final-Report.pdf
4 Roman Tomasic, Routledge Handbook of Corporate Law (Taylor & Francis, 2016) 285.
5 Frederick Wehr and Adrian Cook, ‘The Phoenix South Discovery: A New Hydrocarbon Province on the
Northwestern Shelf of Australia’, (2015) International Conference and Exhibition, Melbourne, Australia 564.

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The cost of Phoenixing a company
Upon being done illegally, it is always preferred to be a cheap trick which leaves behind
itself is the debts, entitlements and navigations of the suppliers and employees who are basically
interested to get reemerge themselves as the shining new businesses.
Phoenix activity are those concepts which are basically based upon ideas of the failure of the
corporate or a company and often gives birth to the new generation form its ashes.
Question 2
Estimation of phoenixing in Australian Economy
Phoenixing is considered as that act of a corporate entity which knowingly avoids the
liquidation of the company i.e. paying wages to the employees, taxes or debts to the creditors etc.
Phoenixing is the name given to those companies which emerges from the ashes of the older
ones but this process basically leaves behind the employees or the contractors or the tax revenue
officers unpaid of their part of the shares6.
According to a PwC report which was made by the Taxation Officer of Australia, Fair
Work Ombudsman and the Australian Securities and Investments Commission an estimated
amount of $5 billion is wiped off form the economy of Australia and all this is due to phoenixing
or dissolving a company illegally and them trying to rebuild it from the ashes. A study i.e.
“Economic impacts of Potential illegal Phoenix Activity” determined that in the year 2015-16
around $2.8 billion to $5.1 billion cost were added in phoenix7.
The direct and indirect cost of phoenixing can be divided into three parts and this was
determined by PwC report which are cost to business, cost to employees and cost to government.
6 Philip Lipton and Abe Herzberg et al, Understanding Company Law (Thomson Reuters, 2016) 1037.
7 Debanjan Mandal and Rudresh Mandal, 'Developing a Framework for Adjudication in a Phoenix Insolvency
Situation: Can the Enterprise Theory Offer a Viable Solution?' (2018) 2018 (39) Business Law Review 64-70.

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This report further emphasized that illegal phoenix behavior acts like tax upon the victims as
they had spent off money, but did not receive any good or service and amount of consumption of
workers also reduced due to missing of their entitlements. As the outcome of phoenix activates
which are illegal in nature are developed around $1.20 billion to 2.36 billion loss was faced by
the household consumptions8. Lastly this report concluded that Australian economy can attain a
significant boost if it is combated with potential illegal phoenix activity in the cost efficient
manner.
Question 3
Widespread of phoenixing in Australia
In Australia the construction industry faces a lots of phoenixing problems. According to the
report made by Senate Economic References Committee (SERC) highlights that the construction
business faces a lots of insolvency and vexed issues of phoenixing in Australia. While being
indulged with the phoenix activity it is generally believed that the liquidating organization will
avoid the payment of wages to the workers while again getting up9.
Some of the characteristics of the construction industry which makes it very difficult for
recovering of debts are the subcontracting systems which is comprised up of those essential
feature taken from all the major building works, where the head of contractor embark on to
accomplish the contracts and gets money from the customer or the client. But generally the work
here is commenced via layers of the subcontractors. Those subcontractors are made to declare
that they would pay of all debts to all employees working under and upon investigation it was
been found that all the declarations so made by the constructers were false or statutory.
8 Australia. Parliament. Senate. Economics Legislation Committee, Treasury Laws Amendment (Combating Illegal
Phoenixing) Bill 2019 [Provisions] (Economics Legislation Committee, 2019) 24.
9 Stephen Bottomley and Kath Hall, Contemporary Australian Corporate Law (Cambridge University Press, 2017)
652.

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This industry employees numerous workers who gets ready to work on the temporary basis and
have very minimal knowledge in this field which becomes easy for the industry to replace them
whenever they feels so10. Thus recovery of redundancy entitlements becomes or creates problems
in this industry.
In the case of ASIC v Franklin11, in matter of Walton Constructions Pty Ltd, some of the key
concerns raised in relation to the issues in construction business are as follows:
The responsibilities are not discharged impartially and independently, concerns of the
constructers are not properly identified or explained etc. Here in this case the respondent were
appointed by the construction industry, without informing them about the collapsing condition of
the company. Here it was found that many of t.he employee here was involved in taking up of
money under the table of which there was no record and this was aiding to the illegal phoenixing
acts. Respondent was also pressurized to undergo with the phoenixing activity by the seniors.
Here the high court determined or ordered to shut down their construction business.
Question 4
Difficulties faced by the regulators in pursuing phoenix activity
Irrespective of the fact that economy of Australia is continuously growing but the duty and
responsibility of the directors in the companies are still the very same and particularly those
duties which arises at the time of insolvency. In Australia it is basically determined that phoenix
activities are mostly connected with those directors individually who are interested in
transferring the possessions of a company surrounded from the debts into the newfangled ones
and then and there they become its director. A company is mainly thought to be working on the
10 James F. Corkery and Bruce Welling, Principles of Corporate Law in Australia (Scribblers Publishing,2008) 409.
11 (2014) FCAFC 85

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name of its directors or the management team so they are held liable for all the business
operations i.e. the transfer of shares made form one company to another. A director is said to
breech its duty if he is involved in a number of phoenix activity.
Duties of the directors in undertaking phoenixing activity
It may be taken as the temporary solution to a raised crises, they help in overcoming mostly all
the problems raised in course of the business, they help in fixing all the quotes relating to the
upcoming phoenix activities, directors also helps in preventing those history of business to repeat
which was giving birth to the black economy etc.12
Acting in good faith is generally expected from the directors and they must accomplish that duty
which can be proved as beneficiary for the welfares of the organization and act with 100%
transparency and honesty in those things which are to be considered for the betterment or for the
interest of the company. Those rights and duties are disclosed to the directors which can aid them
in serving the best outcome for the organization. Breaching of the duty may or may not be
necessarily the result or the outcome of neglecting any fact13. It is very often seen that whenever
a director makes a tough decision while ignoring the basic realities will have to face problems
while performing their duties.
Section 181 of the Corporation Act determines that directors are required to discharge their
duties in the good faith i.e. basically for the interest of the company and for a proper purpose.
It is the duty of the director to examine all the relevant questions which are raised before them
and try to reach a decision however difficult the situation may be and directors must not place
12 Vicky Comino, Australia's "company Law Watchdog": ASIC and Corporate Regulation (Thomson Reuters
Australia Limited,2015) 394.
13 Jason R. Harris and Michael Andrew Adams, Australian Corporate Law (LexisNexis Butterworths, 2016) 697.

BUSINESS LAW 8
restrictions are imposed \on the functions of the directorial decisions for ensuring that directors
are not exempted from stand-in with the superior welfares of the organization.
Section 182(1) of the corporate act suggests that if the position of the directors are misused or
any of their duty is breached or the act is not done in the good faith or for the profit of the
organization or misuses any of the important information of the company then he would be liable
to bare many difficulties14.
In the case of Cook v Deeks15, the important question was determined that it is the authority
which makes the plans in relation to the directors and the officers who cannot take advantage of
an information which belongs to the organization without the earlier sustenance of organization.
Whereas in the case of Grove v Flavel16 it was taken into consideration that examinations of the
rights and duties of all the officers upon the basis of the cases rather than following the uniform
or the inflexible standards which were been used earlier must be implemented.
All loses and other difficulties raised in the company are to be dissolved by the director. He is to
face all the major tough situation and overcome with all of them with very strong and impartial
decisions.
14 Danny Adno, Proposed Legislation to combat illegal phoenix activity (2019)
<http://www.mondaq.com/australia/x/788696/Corporate+Crime/Proposed+legislation+to+combat+illegal+phoenix+
activity>.
15 [1916] 1 AC 554
16 [1986] 43 SASR 410

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Question 5
Sources of early warning signs assisting in identification of
phoenix activity
Phoenix Taskforce whose head are the ATO Australian Taxation Officers are currently
working for identifying and setting their targets directly on the ones who are indulged in the
illegal phoenix activity so to prevent the honest businesses and the workers.
Therefore the warning signs for the employees or the contractors which indicates the
illegal involvement of the employer in the phoenix operations are as follows:
First upon not receiving a pay slip. Second the ABN Australian Business Number and the
name of the company changes but the phone number and the address remain the same. Third
delays in giving salary and also less in amount to the one which was expected as the minimum
wage17. Fourth the name of the employer is different from the one which was acknowledged to
the employee etc.
The warning signs for the owner of the business must be looked out very carefully which
can indicate that the workers were involved in the illegal phoenix activity are as follows:
First upon being offered by a lower quote as compared to the value in the market by the
competitor. Second the directors of the company are found to be involved in the liquidated
entities. Third the payment to be made are requested by other new company and lastly the
changes are made in the name and directors of the company but the manager and staffs remain
unchanged18.
17 ASIC, Illegal Phoenix activity (2019) <https://asic.gov.au/for-business/your-business/small-business/compliance-
for-small-business/illegal-phoenix-activity/exa>.
18 Anneka Frayne, Australia: Illegal phoenix activity- government determined to expand crackdown efforts (2019)
<http://www.mondaq.com/australia/x/809892/Insolvency+Bankruptcy/Illegal+phoenix+activity+government+deter
mined+to+expand+crackdown+efforts>.

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For getting the aid from these phoenix activities the victim can go to ATO Australian
Taxation Office, Fair Work Ombudsman, Australian Securities and Investment Commission
ASIC etc.
Question 6
Proposals and recommendations
The following recommendations are present in the parliament of Australia in relation to
address the increased illegal phoenix activity in Australia.
First is that the due consideration must be given while amending those confidentiality
which is required by the framework of the statutory agencies participating in the phoenix
taskforce and permit them to disclose all the relevant information to the ATO. Second is that all
the resources including the appropriations of specific budget purposes must be directed properly
to the government whose basic aim is to prevent, detect and prosecute all the instances of the
illegal phoenix activity19. Third one is that efforts must be made to increase the engagement of
the regulators with the participants of the industry whose basic aim is to increase and enhance the
flow of information. Forth is that all the cases related to illegal phoenix activity and their
operations must attain clarification and guidance from the intelligent taskforce of phoenix
activity20.
The directors of the company for avoiding the illegal phoenix activity must take into
consideration the four major steps.
19 Matthew Harding and Miranda Stewart, Not-for-Profit Law: Theoretical and Comparative Perspectives
(Cambridge University Press, 2014) 396.
20 Thornthwaite Louise, The living wage crisis in Australian industrial relations.(2017) Labour & Industry a
journal of the social and economic relations of work, 27(4),261-269

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They have already managed the entire responsibility of the company but were not able to
pay of the debts. Then they handover the insolvent company to the external administrators21. The
registered liquidators are to realize the assets of the company and pay of the liquidation costs to
the creditors and the employees. Then lastly the directors may startup with a new business.
Brief recommendations by the corporate laws
Recommendation Description
Enlarge the possibility for banning of
directors
According to the Australian Securities and
Investment Commission (ASIC) a person is
decided to be disqualified from taking up the
chair of the director upon the wounding up of
the organization was found to be unfit for the
post.
Confine the use of a identical name or trading
style by successor company
If the organization has to adopt the similar
name even after growing up from being
liquidated, it is the director who has to be held
liable personally for all the debts.
Approve the policy of insufficient
capitalization
For meeting up the development expectancies
the lifting up of the corporate veil must be
absolutely permitted which can help in setting
up that subsidiary containing insufficient
capital.
The above recommendations may lead a very strong helping hand towards the corporate
business and prevent them from bending towards illegality. Illegal phoenix activity hampers the
economy of a nation so it must be avoided at a large. It will further give birth to the black
economy which reduces the development of a nation at a large.
21 Great Britain, Ian F. Fletcher, Insolvency Act 1985 (Sweet & Maxwell, 1986) 316.

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Bibliography
A Articles/ Books/ Reports
Adno, Danny Proposed Legislation to combat illegal phoenix activity (2019)
<http://www.mondaq.com/australia/x/788696/Corporate+Crime/Proposed+legislation+to+comba
t+illegal+phoenix+activity>.
Amadeo, Kimberly The Black Economy and Its Impact (2019)
<https://www.thebalance.com/black-economy-4173517>.
Anneka Frayne, Australia: Illegal phoenix activity- government determined to expand
crackdown efforts (2019)
<http://www.mondaq.com/australia/x/809892/Insolvency+Bankruptcy/Illegal+phoenix+activity+
government+determined+to+expand+crackdown+efforts>.
ASIC, Illegal Phoenix activity (2019) <https://asic.gov.au/for-business/your-business/small-
business/compliance-for-small-business/illegal-phoenix-activity/exa>.
Australia. Parliament. Senate. Economics Legislation Committee, Treasury Laws Amendment
(Combating Illegal Phoenixing) Bill 2019 [Provisions] (Economics Legislation Committee,
2019) 24.
Ayoub, Joseph Targeting the black economy (2018-19)
<https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/rp/BudgetReview201819/TargetingBlackEconomy>.
Attribution #.0 Australia, Black Economy Taskforce: Final Report, 2017,
https://static.treasury.gov.au/uploads/sites/1/2018/05/Black-Economy-Taskforce_Final-
Report.pdf

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Bottomley, Stephen and Kath Hall, Contemporary Australian Corporate Law (Cambridge
University Press, 2017).
Britain G Ian F. Fletcher, Insolvency Act 1985 (Sweet & Maxwell, 1986).
Comino, Vicky Australia's "company Law Watchdog": ASIC and Corporate Regulation
(Thomson Reuters Australia Limited,2015).
Corkery, James F. and Bruce Welling, Principles of Corporate Law in Australia (Scribblers
Publishing,2008).
Debanjan Mandal and Rudresh Mandal, 'Developing a Framework for Adjudication in a Phoenix
Insolvency Situation: Can the Enterprise Theory Offer a Viable Solution?' (2018) 2018 (39)
Business Law Review 64-70.
Harding, Matthew and Miranda Stewart, Not-for-Profit Law: Theoretical and Comparative
Perspectives (Cambridge University Press, 2014).
Harris, Jason R. and Michael Andrew Adams, Australian Corporate Law (LexisNexis
Butterworths, 2016).
Lipton, Philip and Abe Herzberg et al, Understanding Company Law (Thomson Reuters, 2016).
Louise, Thornthwaite, The living wage crisis in Australian industrial relations.(2017) Labour &
Industry a journal of the social and economic relations of work, 27(4),261-269
Tomasic, Roman Routledge Handbook of Corporate Law (Taylor & Francis, 2016).
Wehr, Frederick and Adrian Cook, ‘The Phoenix South Discovery: A New Hydrocarbon
Province on the Northwestern Shelf of Australia’, (2015) International Conference and
Exhibition, Melbourne, Australia 564.
B Cases

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ASIC v Franklin (2014) FCAFC 85
Cook v Deeks [1916] 1 AC 554
Grove v Flavel [1986] 43 SASR 410