New draft legislation makes phoenix operators personally liable for company debt

New legislation designed to make directors of phoenix companies personally liable for any tax debts incurred has been praised as a step in the right direction, although experts point out the new laws don’t fully define what a phoenix company actually is.

New legislation introduced by Parliamentary secretary to the treasurer, David Bradbury, will make directors personally liable for debts of phoenix companies that are created using a similar name to an already failed company with unpaid creditors.

The law is part of a suite of legislation the Government is packaging as a “Protecting Workers’ Entitlements” commitment, and is separate to another piece of law that would make directors personally liable for corporate tax debts.

“Under these proposals, directors of a failed company can be held liable for the debts of a company that has a similar name to a pre-liquidation name of the failed company – otherwise known as a phoenix company,” Bradbury said in a statement.

“This will stop directors from exploiting the limited liability protections in the corporations law to avoid having to pay any debts, including workers’ entitlements, that they incur in a ‘phoenix’ company.”

Part of the suite of legislation will also give ASIC the power to wind up companies.

Dissolve founder and chief executive Cliff Sanderson says although there are plenty of details to sort out, “it’s a step in the right direction”.

“It’s always been my concern that there isn’t really a definition of a phoenix company, and there is no section in the law that strictly defines it. Therefore, liquidators are left using other sections that aren’t specifically drafted with this purpose.”

Sanderson adds that one aspect of the law is strange, and will need further investigation.

“The law basically states that if you’re using the same name of a company that failed, you will be personally liable for debts – but only in the new company.”

“That’s a little strange. If a company goes into liquidation, you create a new one, you’ll be personally liable for the debts of the new company. It doesn’t satisfy the creditors of the old company.”

Sanderson says despite the legislation, work still needs to be done in defining what exactly a phoenix company is and how it should be handled.

“This is a difficult area. Most people think they know what one was, but it’s hard to define, and it’s hard to craft legislation around when it’s not generally very clear.”

“A successful voluntary administration is technically a phoenix company. So we need to keep working at that. Having said that, the law is a good step.”