Zombies vs Phoenixes may sound like a cool video game concept but when it comes to Company and Corporate Law this is referring to Zombie Companies and Phoenix Companies.
These types of company set ups are problematic. Let’s explore each one further below:
Zombie Company
A zombie company is a company that earns enough money to continue operating but not enough to pay off their debts. They usually manage to just get by with overhead costs – wages, rent, interest payments on debt, etc – but have no excess capital to invest into growth. They often have large amounts of historic debt and many rely on bailouts.
The term ‘zombie company’ was first coined by the media in the early 90s in Japan. Many companies with large historic debts were deemed by the banks “too big to allow to fail.” But as they continued operating it resulted in a market crash.
As a result of Covid-19, the Government implemented rules to keep failing businesses alive in Australia. However as a result of these rules it created a stockpile of non-viable zombie businesses and phoenix companies.
Zombie companies are an issue for the economy as they weaken economic growth, are vulnerable to market conditions changing and they keep assets tied up in companies that can’t afford to invest and build their businesses.
Zombie Companies Over Covid-19
This Sept 2020 article from The Sydney Morning Herald explored the growing stockpile of zombie companies in Australia as a result of Covid-19. At the time, the government implemented temporary measures to help keep the economy afloat. This included changes to insolvency law and the implementation of the JobKeeper program. Many insolvency relief measures ended on 31st Dec 2020 and the JobKeeper program ended in March 2021. As expected at the time, insolvencies sharply increased once JobKeeper ended.
Many believed the temporary protections against insolvency simply created a time-bomb of heavily indebted non-viable businesses, meaning a number of zombie businesses were kept artificially afloat as a consequence.
Check out this article here for more.
What About Zombie Agreements?
A Zombie Agreement is a workplace instrument that is past its nominal expiry date but continues to operate, usually because it hasn’t been terminated or replaced by another agreement.
This means that the wages and conditions of workers remains as per the agreement and do not improve as changes occur to the modern awards. This can impact workers negatively, leaving them without entitlements they would otherwise have access to if they were employed under their industry’s award.
In 2022, an Australian teenager took fast food franchise Subway to the nation’s industrial relations watchdog to terminate an agreement the union says “rips off” thousands of young workers.
Chantelle Zentveld, who had recently turned 17, lodged an application in the Fair Work Commission to terminate an Enterprise Agreement under which a cluster of 60 Subway employers operate.
The agreement was approved in 2011 and its nominal expiry date was in 2015.
Ms Zentveld said because wages and conditions have remained as per the agreement without improving with modern awards, she and others received no penalty rates, which they would if they were on the Fast Food Award. Read more here.
Phoenix Company
A phoenix company is created through the illegal practice of company directors transferring the assets of an existing company to a new company without paying true or market value, leaving debts with the old company. Once the assets have been transferred, the old company is placed in liquidation. When the liquidator is appointed, there are no assets to sell so creditors cannot be paid.
It’s a practice that indirectly hurts the broader community because the company avoids paying tax and the government often has to subsidise outstanding employee entitlements.
In 2019, the Economic Impact of Potential Illegal Phoenix Activity Report found that illegal phoenix activity costs employees between $31 and $298 million in unpaid entitlements and costs the government around $1,660 million in unpaid taxes and compliance.
There are heavy penalties for illegal phoenix activity including, but not limited to:
* Large fines
* Up to 5 years imprisonment for company directors and secretaries
* Each person involved in the activity from the pre-insolvency adviser, valuer, liquidator and dummy directors all held legally responsible.
The ASIC website (www.asic.gov.au) details warning signs of illegal phoenix activity and how to report such incidents.
Financial Crime
We’ve written about this topic in the past, check out our blog article here.
Phoenix companies are an example of financial crime which refers to all crimes that involve taking money or other property that belongs to someone else, to obtain a financial or professional gain.
Financial crime also has significant direct impacts on individuals and businesses.
Examples can include:
*Cyber criminals who steal people’s life savings or identities
*Companies which are deliberately liquidated, wound up or abandoned (referred to as illegal phoenix activity) before they can pay creditors such as the ATO, honest businesses or subcontractors
*Organised criminals who orchestrate illicit growing operations, robbing our community of millions in revenue and taking business from legitimate retailers.
Director IDs
In Australia there are approximately 2.5 million company directors, of which more than 1.3 million directors have applied for (and have been issued with) a director identification number (director ID).
So, what is it?
A director ID is a unique 15-digit identifier given to a director who has verified their identity with the ATO.
You must apply if you are a director of a company, corporate trustee of an SMSF, charity or not-for-profit organisation that is a company or a corporation registered under the Corporations (Aboriginal and Torres Strait Islander) Act.
The requirement also applies to directors of foreign companies registered with ASIC and carrying on business in Australia (regardless of the director’s place of residence).
It’s compulsory and penalties may apply for not registering for a director ID.
Director IDs have been brought in to help prevent illegal phoenix activity and the use of false or fraudulent director identities. A director ID number is assigned for lifetime use that can track and record a director’s history with a company (or companies). They are being made mandatory for every director covered by the Corporations Act.
At Litton Legal we can assist with all aspects of commercial law, including corporate and company law. Get in touch with our team here.
