Labor spruiks company director ID plan: Is there bipartisan support to protect SMEs from phoenix companies?

Small business groups are hoping to see a rare display of bipartisanship after Labor today unveiled a new policy suite to expose “dodgy” company directors and eliminate illegal phoenix activity in Australia.

The Labor opposition has pledged to crack down on company directors who breach their legal obligations by promising to introduce compulsory ID numbers for all directors of Australian companies; increase the maximum penalties associated with illegal phoenix activity; and take on a number of recommendations from a comprehensive suite of research findings on phoenix activity that was handed down by Monash and University of Melbourne researchers in February.

In a joint statement, Shadow Minister for Employment and Workplace Relations Brendan O’Connor, Shadow Small Business and Financial Services Minister Katy Gallagher and Shadow Assistant Treasurer Andrew Leigh said the federal government had been too lax on regulations in this area for too long.

“Currently it is easier to become a company director than open a bank account, yet the government has barely raised a peep about phoenix activity,” they said. 

“This process allows them to avoid paying the money owed to the failed company’s creditors, which are often the company’s employees, other small businesses and the Australian Tax Office.”

Illegal phoenix activity, which is estimated to cost the country up to $3.2 billion annually, involves companies moving assets into new entities prior to liquidating their initial businesses in order to avoid paying money owed to creditors and tax authorities. The behaviour has been the subject of a number of government inquiries over the past two years.

While Labor accuses the government of being silent on the issue, the Coalition has engaged with the idea of a “Director Identification Number” (DIN) and other measures to protect the business community from unscrupulous individuals, including in its most recent response to a Productivity Commission Report into the area.

The Commission recommended the DIN as a simple way of tracking company director’s actions across their lifetimes, allowing regulators to see patterns of unusual behaviour. In response, the government said it had “noted” the recommendation and would consider the policy further.

In a statement provided to SmartCompany at the time, Small Business Minister Michael McCormack said the government was still considering the option “as part of [the government’s] ongoing work on insolvency reforms”.

Council of Small Business Australia chief executive Peter Strong told SmartCompany this morning that moves to tighten regulation in areas like phoenix activity and fighting the “black economy” show there’s a move away from approaches that have hurt the small business community in the past.

“In many ways, what we’re approaching now is the end of ‘laissez faire’ approaches to regulations,” Strong says.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell says small businesses continue to get stung by “repeat offenders” engaging in phoenix activities, particularly in the construction space.

“Most of us are just amazed that at this stage there isn’t capacity to track company directors that have serially offended,” Carnell says.

University of Melbourne law professor Helen Anderson, who has conducted extensive research into phoenix companies, told SmartCompany this morning she’s feeling positive about policies like the Director Identification Number gaining traction, and there has been no credible rebuttal of the policy that has been raised over the course of a number of reports and inquiries.

“There’s no plausible argument being put out against it,” Anderson says.

When it comes to Labor’s pledge to increase penalties for those engaging in phoenix activities, Anderson says it’s important to understand there is no specific law against phoenix activity. Instead individuals can face court for breaching their duties as company directors, and on this front the maximum civil penalty has not changed in 24 years.

“The civil penalties breach is $200,000 and it’s been that way since 1993. We’ve said this is silly, so we recommended a whole range of possibilities,” she says.

Under Labor’s plan, the maximum penalty for breach of director’s duties under the Corporations Act would be increased to $500,000. In a statement provided to SmartCompany, shadow treasurer Andrew Leigh said Labor welcomed feedback from SMEs on other recommendations that Anderson’s Phoenix research team had previously handed down.

“Among the issues to be addressed in consultations are security of payments; the Director Penalty Notice regime; the pre-insolvency advice industry; and improving the ability of creditors, employees and taxation authorities to check whether directors are or have been disqualified by ASIC or the courts,” Leigh said.

Strong says it would be great to see “some bipartisan agreement” on the proposed changes, given the current regulatory frameworks are too complex and make it easy for scammers to behave badly.

“The other lesson we’ve learned is you’ve got to remove complexity [in these areas]. The more complicated it is, the easier it is for scammers and dishonest people,” he says.

SmartCompany contacted Senator Katy Gallagher but she was unable to provide comment prior to publication.

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* This article was updated at 3:50pm on May 24 to include comment from the shadow treasurer.