Director identification numbers proposed to detect phoenix companies
All company directors should have a personal identification number linking their past and present directorships to help stamp out harmful phoenix activity, according to researchers from the University of Melbourne Law School.
The researchers said phoenix activity - where directors intentionally shut down their companies after shifting their assets to new companies to defraud taxation authorities, trade creditors and employees – costs the Australian economy more than $1 billion a year.
A three-year investigation by researchers at the University of Melbourne Law School and Monash Business School has resulted in 25 recommendations on how to clamp down on unscrupulous directors.
“It is hard to believe, but at the moment it is more difficult to obtain a driver’s license or a bank account than it is to become a company director – there are no identity or background checks,” said University of Melbourne corporate law expert Professor Helen Anderson, who led the study.
“The situation is causing terrible pain. Not only are small traders and consumers suffering significant financial damage as debts are not repaid and deposits are lost, but as a law-abiding tax payer myself the cost in unpaid taxes drives me crazy,” she said.
“Dodgy directors are going under the radar where the regulators can’t join the dots.”
The researchers also recommend that the regulator, the Australian Securities and Investment Commission, allow free-of-charge searches of company databases.
“Phoenix isn’t a problem that we can enforce our way out of. Prevention is better than cure,” Professor Anderson said.
“We need to make it easier for people to do their own research. The casual phoenixers will then have to be more wary of getting caught.”
Professor Anderson said phoenix activity is not necessarily illegal, and can be a legitimate way to rescue a business, but can be problematic when inept entrepreneurs repeatedly fail and leave creditors unpaid.
It becomes illegal when people shut down businesses to intentionally defraud their creditors. It is these defrauders and the inept entrepreneurs that Professor Anderson and her colleagues want to target.
“We don’t want to penalise people running limited liability companies unless they’ve done something wrong," Professor Anderson said.
"Going into business involves some risk and we need to provide entrepreneurs with some protection. But we need to be able to identify and take action on the serial failures out there, whether people are doing it deliberately or not.”