Illegal phoenix activity

Illegal Phoenix Activity

Ahmad Subar Bin Syed Sahir

Table of Contents

1.0 Introduction12.0 Insolvency and Liquidation22.1 Insolvency22.2 Transactions under insolvency32.3 External Administration42.3.1 Voluntary Administration (Australian)52.3.2 Pre-pack administration (UK)52.3.3 Malaysian approach52.4 Just and Equitable grounds (Wind Up)62.5 Phoenix Amendment (Australian)62.6 Similar Name Bill (Australian)73.0 Taxation83.1 PAYG (W) (Pay-as-you-go (withholding))93.2 DPN (Director Penalty Notice)93.3 Malaysia and UK94.0 Directors Duties104.1 Duty of good faith104.2 Use of position and information114.3 Liability on insolvent trading and asset transfer134.4 Disqualification135.0 Reformation of laws145.1 Director duty and disqualification156.0 Conclusion177.0 Bibliography188.0 Appendices25Appendix A25Appendix 126Appendix 227Appendix 329

1.0 Introduction

Phoenix Company (PC) is a newly incorporated entity that brings a continuance of insolvent business through inheriting its characteristics, such as name, employees, assets and etc. It illustrates the fundamental concept of limited liability, since it allows failing businesses to start in new corporate form with clean sheets. The introduction of PC is intended to encourage entrepreneurship and values of commercial risk taking, which serves as wealth creation and well-functioning market.[footnoteRef:1] Hence, this arrangement is legitimate and should not be misunderstood with the intentional conducts designated to abuse the purpose itself. Phoenix fraud (PF) (a.k.a illegal phoenix activity) is a board collection of different fraudulent techniques that escape debt obligation with insolvency liquidation (used simultaneously with wind up). [1: Department of the prime minister and cabinet (DPMC), Taxation changes to address fraudulent phoenix activity (2011)]

The legal regime against PF in Malaysia will be evaluated based on four perspectives, namely the insolvency and liquidation, taxation, directors duty, as well as the aspect of reformation. The evaluation will consider relevant Acts of the United Kingdom, Australia and Malaysia (refer to Appendix 1).

2.0 Insolvency and Liquidation

2.1 Insolvency

Insolvency generally referred as company that undergone financial distress, where its ability to discharge liabilities remain questionable.[footnoteRef:2] Fraudulent phoenix activities are associated with insolvency as the company always remain with minimum resources that cannot fully repay the piled debts.[footnoteRef:3] Despite of it, insolvency law is well structured legislation to address some of the phoenix issues. As under the stated provision, there are additional requirements for company to be complied with, particularly towards questionable transactions that could amount to fraud. [2: Wests Encyclopedia of American Law (2nd edn, 2008)] [3: Australian Securities & Investment Commission (ASIC), Small business illegal phoenix activity (ASIC, --)]

UK has an omnibus act for insolvency issue, namely Insolvency Act 1986 (IA 1986). Through its amendment with the new Enterprise Act 2002, rehabilitate features has taken the main role in the form of promoting administrative receivership.[footnoteRef:4] Legitimate phoenix arrangement is one effective tool in rescuing the business and commonly applied in UKs business environment. Besides, the legislative body has introduced the out-of-court route.[footnoteRef:5] In fact, UKs legislation has prominent influence across commonwealth countries, which are in relation to both Australia and Malaysia. [4: PWC (London), Insolvency in brief (PWC, 2009)] [5: ibid]

Unlike UK, Malaysia is similar with Australian Acts as they have yet to formulate an Act solely enacted for insolvency issues, but these provisions are incorporated into their respective company acts.

In Malaysian context, philosophy of insolvency law is projected through the combination of distributive, rehabilitative and punitive features.[footnoteRef:6] However, application of insolvency law favours the interest of creditors (creditor focused system), as practitioners of the laws are focused on collection of debts and protection of creditors. Practically, insolvency has been an effective tool to recover debts by creditors in Malaysia, particularly banks.[footnoteRef:7] In fact, Malaysians statutory law that favours liquidation proceedings during insolvency facilitates creditors to recover debts before sinking into a greater one.[footnoteRef:8] Hence, it might serve as deterrent of phoenix arrangement at certain extend. [6: Roman Tomasic, Insolvency law in East Asia (Ashgate Publishing 2013) 321] [7: ibid] [8: Secretariat to the Corporate Law Reform Committee (CLRC), Reforming the Corporate Insolvency Regime (SSM, --)]

In Australia, ASIC can provide various programs to support anti-phoenixing when insolvency issues occur, such as Assetless Administration Fund that funds preliminary investigations by liquidators on insolvent companies with little assets; National Insolvent Trading Program that encourage directors to be proactive in managing companys financial position as well looks for advice once financial distress occurs, and; Liquidator Assistance Program which serves to supervise directors honesty in providing companys information during external administration.[footnoteRef:9] [9: Australian Government, Action against fraudulent phoenix activity proposal paper (Australian government, 2009)]

2.2 Transactions under insolvency

Generally, transactions under insolvency are potential breach of law in subject to nature itself. Part 5.7B of the Australian Corporation Act addresses the avoidance regime, where its interest is deemed to protect unsecured creditors toward voidable transaction.[footnoteRef:10] Section 588FE provides 3 classes of voidable transactions while others are stipulated in s588FA (unfair preference), s588FDA (director-related transaction) and s588FB (uncommercial transaction).[footnoteRef:11] S588FD describes forms of fraudulent transaction, where its intent is to defeat, delay or interfere with the rights of creditors.[footnoteRef:12] In fact, law for insolvent trading in Australia is stricter than those in UK.[footnoteRef:13] [10: Helen Anderson, The proposed deterrence of phoenix activity: an opportunity lost? (2012) 34(3) Sydney Law Review] [11: John Warde, Uncommercial Transactions (Allens Arthur Robinson, 2003)] [12: ALII, Corporation Act 2001, s 588FE] [13: Mark Wellard, UK pre-packs reforms: pause for thought in Australia? (2011) 23(2) Australian Insolvency Journal]

The Australian position are similar towards the breaches stated in Part 4 Chapter X of the UKs IA 1986, particularly under s213 and s214(2)(b).[footnoteRef:14] Breach of fraudulent trading under insolvency in UK, however, could be justified just by single transaction.[footnoteRef:15] Nonetheless, the legal action is depending on liquidators initiation, and its interest would be in conflict since pursuance of action is personally financed.[footnoteRef:16] Possible fraudulent offences are defined in s206 s211 of IA1986.[footnoteRef:17] Another noticeable indication of PF would be discarding assets with amount lesser than fair value. In UK, s238 and s241 of IA1986 provides the breach and court are capable to reverse that particular transaction (similar to Australias s588FB).[footnoteRef:18] Section 423 provides for creditor to claim their rights on undervalued transaction that intended to defraud them.[footnoteRef:19] [14: Lorraine Conway, Phoenix trading (parliament UK, 2012)] [15: ibid] [16: PWC (London) (n 4)] [17: Insolvency Act 1986, s 206 s211.] [18: KSA Group, Expert complete guide to creditors voluntary liquidation (2011)] [19: Slaugther and May, Setting aside vulnerable transaction - an update (2011)]

However, in Malaysia, no specific provision is invoked for wrongful trading.[footnoteRef:20] Instead, Companies Act 1965 (CA1965) approached these issues using provision that are relevant. Section 214 enforces members of the company to contribute in payment of liabilities when the asset is insufficient to cover the repayment debts.[footnoteRef:21] While in s 295, liquidator are given power to examine cash transactions with directors related party and challenge director onto breach of fiduciary duties when conflict of interest arise.[footnoteRef:22] The proviso itself is limited to cash only as well as in absence of guidelines on valuation methodology, which post difficulty in law enforcement.[footnoteRef:23] Liquidator that found director has undergone fraudulent trading can invoke s304 to recover debts.[footnoteRef:24] However, the interpretation only agrees to breach when all creditors are being defrauded, while attempts in proving intention is difficult as well.[footnoteRef:25] [20: Hasani Mohd Ali, Review of creditor protection in Malaysia (2005) 9 Jurnal Undang-Undang dan Masyarakat] [21: Aishah Bidin, Liabilities of directors under Malaysian insolvency laws and recovery of asset during corporate insolvency (2004) 8 Jurnal Undang-Undanag dan Masyarakat] [22: ibid] [23: ibid] [24: Hasani Mohd Ali (n 20)] [25: Aishah Bidin, (n 21)]

2.3 External Administration

During insolvency, external administration or liquidators will come in place to oversee the company (Appendix 2).[footnoteRef:26] Eventually, the company could either enter into restructure, liquidation or wind up. In fact, one of its purposes is to aid companies in business transition during legitimate phoenix arrangement. Subsections below illustrate different forms of external administration that relevant with PF. [26: Malaysia institute of accountants (MIA), Insolvency: Learning the essentials of corporate liquidation ; PWC, Insolvency in brief]

2.3.1 Voluntary Administration (Australian)

The Voluntary Administration sets in with its aim to rescue the business, as provided in s 435A (CA 2001).[footnoteRef:27] It can undergo processes such as legal buyout or pre-pack asset purchase, in a sense that it similar to some of the phoenix arrangement. The package is supposed to regulate phoenix activity through voting of creditors offered under Deeds of company arrangement (DOCA). It allows creditors to call for wind up if the deal is deemed unfavourable.[footnoteRef:28] S 600A further provide court with distraction to set aside the decision of related party votes on DOCA. However, the process and investigation itself is cumbersome, intrusive, costly and detrimental to the business.[footnoteRef:29] [27: Helen Anderson (n 10)] [28: ibid] [29: OBrien Palmer (OBP), Pre-packs- do they have a place in Australia insolvency practice? (OBP insolvency & business recovery, 2012)]

2.3.2 Pre-pack administration (UK)

Pre-pack administration engages in selling assets of an insolvent company, at an accelerated pace as compared to traditional insolvency, including Australians voluntary administration.[footnoteRef:30] The insolvency practitioner would obtain the best deal for creditor during the selling process. However, these transactions are perceived as backdoor transaction, and the recoverable by unsecured creditors are often lesser than insolvency through other tools.[footnoteRef:31] Its purpose of conducting sale without open market valuation is to retain goodwill and interest of business itself. Often, the sale target would be existing directors. Besides, administrators are responsible for both sales and evaluation on realisation of market value, in a sense it give rise to conflict of interest.[footnoteRef:32] It is an express package for phoenix arrangement, as well for its vulnerability towards PF. [30: NicholasCrouchandShabnamAmirbeaggi,'Pre-packs: a legitimate means to phoenix an insolvent company' [2011] Recovery (Summer) ] [31: Peter Walton and Mark Wellard, A coparative analysis of anglo-Australian pre-packs: can the means be made to justify the ends? (2012) International Insolvency Review] [32: NicholasCrouchandShabnamAmirbeaggi (n 30)]

2.3.3 Malaysian approach

In contrary, no external juridical management administration is given in the course of insolvency that similar with Australia and UK.[footnoteRef:33] Instead, corporate restructuring or liquidation is applied in Malaysian context.[footnoteRef:34] The possible relevant body engaged in administration would be PDNBA, an asset management company. Malaysians Pengurusan Danaharta Nasional Berhad Act 1998 (PDNBA) has set out two special permissions for Danaharta, namely to buy assets through statutory vesting and the ability to foreclosure or appoint special administrator to manage distressed companies (Special Administration).[footnoteRef:35] This ability is said to be derived from administration in Australia, UK and US. [33: CLRC, A consultative document (SSM, 2007)] [34: ibid] [35: Lawyerment, Danaharta (Lawyerment, 2011) ]

2.4 Just and Equitable grounds (Wind Up)

Companies could be charged to wind up under just and equitable ground, whether or not it is insolvent. The judges in Commissioner ofTaxation of the Commonwealth of Australia v Casualife Furniture International Pty Ltd [2004] VSC 157 held that due to managements frequent abuse of phoenix arrangement, it is just and equitable to call for wind up as a preventive action.[footnoteRef:36] Its financial condition as well as immediate repayment of tax debts does not amount to release of charges because management has lost its trustworthiness in going concern basis. Nonetheless, it only applies to new company that could potentially participate in PF.[footnoteRef:37] Similarly, in UK, Insolvency (Amendment) Rules 2010 Chp 45 (proceedings up to order) Part 2-45.33 stated that winding up in just and equitable are only applicable when formation of company are intended for fraud (in this case PF) as reference to Re Thomas Edward Brinsmead & Sons [1897] 1 Ch. 406.[footnoteRef:38] [36: Orla Mccoy, Phoenix Fever (Clayton UTZ, 2012)] [37: ibid] [38: The insolvency Service, Chp 45: Proceedings up to order (September 1997) (Department for Business, Innovation and Skills (BIS), --)]

2.5 Phoenix Amendment (Australian)

Under the new phoenix amendment, Part 5.4C is inserted into the Corporations Act 2001 to provide ASIC the power to wind up abandoned company, when it deems to be deserted by its directors.[footnoteRef:39] Besides, ASIC can reject voluntary deregistration if liquidation is considered as more appropriate course of action.[footnoteRef:40] It is intended to solve the issues of dormant company with unpaid debts, and when no creditor seeks the appointment of a liquidator. In addition, it allows the company's employees to qualify for GEERS.[footnoteRef:41] The major changes made are summarised as in figure below, [39: Murdoch Lawyers, Company law reform update ASICs fight against phoenix companies continues (Murdoch Lawyers, 2013)] [40: ibid] [41: Orla Mccoy (n 36)]

1. Provide ASIC with a power to wind up companies which have been abandoned by their directors under certain specified circumstances, and after ASIC has given notice on its database of its intention to order the winding up of the company and published notice of that intention

2. Allows the publication of insolvency notices on one, publicly accessible website administered and maintained by ASIC.[footnoteRef:42] [42: Murdoch Lawyers (n 39)]

Figure 1: Major changes on Corporations Amendements (Phoenixing and other measures) Act 2012Liquidators will be assigned to investigate the corporation for possibility of breach of duties as well as evaluates debts obliged to repay unsecured creditors and employees entitlements.[footnoteRef:43] This power would help ASIC in shifting certain responsibility in detecting and prosecuting phoenix activity to a liquidator.[footnoteRef:44] The problem arises when companies are assetless, as liquidators might reject appointment due to insufficient funds to carry investigation. Hence, AAF is introduced for this purpose to support the external liquidators. [43: ibid] [44: Helen Anderson (n 10)]

With its ability to call liquidation without court approval (subject to circumstances), it practically simplify the process, reduces costs and accelerates the commencement of liquidation.[footnoteRef:45] Hence, liquidator could be more engaging in dealing with breaches of directors duties as well as to retrieve voidable transactions under the Corporations Act Part 5.7B, div 2.[footnoteRef:46] [45: ibid] [46: ALII, Corporation Act 2001 Part 5.7B Div. 2]

2.6 Similar Name Bill (Australian)

Fraudulent phoenix activity often adopt similar trading name and trading style to ensure its business are not affected by the arrangement. For instance, a similar name allows a switch of cheques payable from precedent company into the new companys bank account.[footnoteRef:47] It should be noted that this transaction is chargeable under Corporations Act s 182(1) when its found to be illegal.[footnoteRef:48] The Corporations Amendment (Similar Names) Bill 2012 is enacted to restrict the use of same or similar name of its precedent company.[footnoteRef:49] In fact, it is originated from s216 (Prohibited name), under UKs insolvency law 1986.[footnoteRef:50] Under this proviso, it can charge the director personally or jointly liable for companys debts if the name is similar with a pre-liquidation name of the failed company which also managed by same director.[footnoteRef:51] UK approached similar by testing whether the name would be so likely that external stakeholder deemed they are associated.[footnoteRef:52] In Malaysia, there is no definite law that constraints the use of name of liquidated company. As reference to the relevant Part X (CA1965) (Winding up), there is no proviso that shows consistency with this topic. [47: Helen Anderson (n 10)] [48: ibid] [49: Australian Government (n 9)] [50: ibid] [51: Orla Mccoy (n 36)] [52: Karslakes Solicitors, The very long arm of section 216 insolvency act 1986 and phoenix provisions. ]

3.0 Taxation

Tax authority is one of the largest unsecured creditors in claiming tax liabilities during phoenix arrangement. Generally, PF would disregard tax liabilities and it contributes on parts of the debt accumulation that has no intention to pay. Looking PF from taxation perspective, commissioner sought to enhance its capability to recover tax liability through statutory claims as well as draws out deterrent mechanisms, to ensure directors are accountable in fulfilling obligation.

In comparison to UK and Malaysia, Australias Australian Taxation Office (ATO) is proactive in developing various mechanisms and revamping of provision to ensure PF cannot escape their tax liability, such as recent Tax Laws Amendment (2011 Measures No 8) Bill 2011 (Cth). In general scope, ATO introduced phoenix risk model that collaborate with different parties to identify frequent abusers as well as conduct surveillance on companies that intends to default tax liabilities.[footnoteRef:53] [53: Australian Taxation Office (ATO), ATO sets sights on fraudulent phoenix activity (Australian Government, 2013)]

3.1 PAYG (W) (Pay-as-you-go (withholding))

PAYG (W) provides a channel to partially withhold the payments to employee in order to meet its year-end tax liabilities. Common practice of PF is to default the payment. Besides, under this system, directors could claim credit amounts withheld that did not remitted to the Commissioner. However, when PF arise, Commissioner is given option to deny the credit with evidence to prove that no money is being withheld.[footnoteRef:54] It limits the ability to deny as there would be difficulty in obtaining evidence. Besides, new amendment forbids directors to discharge director penalties through administration or liquidation when PAYG withholding or superannuation guarantee remains unpaid and unreported.[footnoteRef:55] [54: DPMC, Countering Fraudulent Phoenix Activities by Company Directors (2011)] [55: Helen Anderson (n 10)]

3.2 DPN (Director Penalty Notice)

Under Section 269-15 of schedule 1 to the TAA, an obligation is posted onto director to take actions regarding PAYG(W) payments to ATO before due, otherwise directors himself will be personally liable.[footnoteRef:56] Director is allowed to select one of the following options to comply with the proviso. It should be noted that director could no longer escape liability through 2 latter options after recent tax amendments. [56: Australian Government (n 9)]

- comply with its obligations in relation to paying the PAYG(W) amounts to the Commissioner;- to enter into a payment agreement with the Commissioner in relation to the amounts; - to appoint an administrator of the company; or - to wind up the company.

Figure 2: List of available actions after received DPN3.3 Malaysia and UK

Similarly to DPN, UKs HM Revenue and Customs (HMRC) approach phoenix activity by issuing Personal Liability Notice (PLN).[footnoteRef:57] The notice indicates that HMRC considered the receiver has intention to evade its obligation towards tax liability. Under s85 of Financial Act 2011, it allows HMRC to obtain a security from employers when there is risk of intending to neglect payment of PAYE (PAYG-W for Australia) or NICs.[footnoteRef:58] In contrary, Malaysias Inland Revenue Board (LHDN) effort in mitigating tax evasion does not specify evasion attempts in the form of phoenix arrangement. The capacity of LHDN in recovering tax liability during course of insolvency remains questionable. [57: HM Revenue & Customs (HMRC), NIM12204 class 1: personal liability notices: what is a phoenix company? (HMRC, --)] [58: HMRC, Review of HMRCs power, deterrents and safeguards (HMRC, --)]

4.0 Directors Duties

Directors duties form major parts of the applicable laws in addressing phoenix issues. Instead of assessing PF at a corporate perspective, these provision will target the directors itself to serve as a deterrent for them in engaging PF. A director owes a duty towards its company under both general law and statutory duties. In general law, it could be categorised into duty of care, skill and diligence as well as fiduciary relationships that amounts to equitable duties.[footnoteRef:59] Statutory duties draw out definite condition to be complied, as an addition on general law. The general view of statutory provision underlined within the Act between Australia, Malaysia and UK are deemed to have little disparity, due to their inheritance from UK legislation. The breach of said legislations could potentially enforce liabilities on directors or holdings company, in regardless of separate legal entity, where it commonly known as piercing veil of corporate. [59: Angela Martin, Directors duties and phoenix companies (Allens Arthur Robinson, 2007)]

4.1 Duty of good faith

Whilst in respect to phoenix arrangement, director is required to act in good faith and exercise their discretion bona fide in the interests of the company and act honestly in what they consider to be the interests of the company.[footnoteRef:60] [60: ibid]

A director also has a fiduciary duty to act in good faith for the benefit of the company as a whole. This is a subjective duty of good faith imposed on directors. In Re Smith & Fawcett Ltd it was held that directors must act "bona fide in what they consider - not what the court may consider is in the interests of the company.".[footnoteRef:61] [61: ibid]

The statutory provision located in s181 (Corporation Act 2001) reflects the common law in requiring a director to exercise their powers and discharge their duties that similar to those stated in general law. In UK, the similar proviso is found in s172 of Companies Act 2006.[footnoteRef:62] For Malaysian context, section 132(1) requires director to act in good faith as well as execute power for a proper purpose.[footnoteRef:63] The proper purpose is similar to those stipulated in use of position and information. [62: Company Law Club, Directors duties] [63: Sujata Balan, Reform of the law relating to directors duties in Malaysia (2011) 4(1) SEGi Review]

4.2 Use of position and information

In Australia, General Law defined proper and mixed purpose in directors decision making and its duty to remain discretion from instruction of other individual.[footnoteRef:64] It is consistent with s180 of the Act regarding duty of director to act with care and diligence.[footnoteRef:65] [64: Angela Martin (n 59)] [65: ibid]

Under section 182(1) and 183(1), it expresses the misuse of position and information to gain personal interest, or bringing loss to the company.[footnoteRef:66] These provisions are described in purposive meaning rather than a causative meaning, as the actual consequences is not regarded. The cases below illustrate different interpretation of provision can bring action towards specific conducts within illegal phoenix activity. [66: ibid]

Grove v Flavel. Determine the term improper should be interpreted by case basis.[footnoteRef:67] [67: ibid]

R v Heilbronn, Directors involved in PF could be sentenced through breach on improper use of position as officer.[footnoteRef:68] [68: Helen Anderson (n 10)]

Cook v Deeks The authority for the proposition that directors and officers cannot exploit an opportunity or information that belongs to the company without the prior approval of the company.[footnoteRef:69] [69: Angela Martin (n 59)]

Mordecai v Mordecai It expands the context of provision from confining in actual accrual of an advantage or detriment towards broader view, where constituting conflict of interest is considered a similar breach.[footnoteRef:70] [70: ibid]

Jeffree v National Companies and Securities CommissionIt extended the duty of directors for company, shareholders and present creditors towards prospective creditors. Although the consideration paid in phoenix arrangement is adequate for current creditors, its disregard to future creditor is charged as improper in gaining advantage.[footnoteRef:71] [71: --, Case note (1989) 17 Melbourne University Law Review]

Figure 3: List of cases related to directors duties

From UK perspective, use of position and information are not explicitly stated. S171 s177 of the CA2006 provides the general duties of director in managing a company.[footnoteRef:72] The law highlights the duty of director in ensuring interests of company are not impaired.[footnoteRef:73] However, Australian perceives the duties as loyalty toward the company.[footnoteRef:74] Its significance is just a difference in legislative wording for the duties and defences, reporting obligations, shareholder derivative actions, as well as corporate governance law and regulation. [72: Bryan Horrigan, Directos duties and liabilities where are we now and where are we going in the UK, broader commonwealth, and internationally? (2012) 3(2) International Journal of Business and Social Science] [73: ibid] [74: ibid]

Directors duties in Malaysia are consolidated in section 132 (CA1965) and not read in isolation with relevant duties stated in other provision.[footnoteRef:75] Immediately after s132(1), s132(1A) has taken UKs forms of duty of care, skill and diligence, as quoted below, [75: SSM, Companies act 1965 s 132]

A director of a company shall exercise reasonable care, skill and diligence with :(a) the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and (b) any additional knowledge, skill and experience which the director in fact has.[footnoteRef:76] [76: Sujata Balan (n 63)]

In course of insolvency, there are no specific sections that impose directors duty towards creditor in CA1965, but avenues are provided at an extent it suffices to protect creditors interest.[footnoteRef:77] Avoidance provision sets out breach by diminishing companys asset in relation to bring prejudice against creditors. [77: Hasani Mohd Ali (n 20)]

4.3 Liability on insolvent trading and asset transfer

In reference to insolvency section, director will be liable when it is reasonably aware that the incurred debt will cause insolvency. For instance, a director has breached s588G(2) (duty to prevent insolvent trading) or (3) (insolvent trading is deemed to be dishonest) in relation to the incurring of the debt by the company.[footnoteRef:78] As such, creditor can sought for compensation at amount equal to "loss or damage" caused by the breach under subsection 588M(3) of the Act.[footnoteRef:79] Although directors can be charged liable in engaging insolvent trading from both UK and Malaysia, no provision has conferred about duties of director on stated transaction. [78: ALII, Corporation act 2001 s 588G] [79: Bryan Horrigan (n 72)]

In terms of asset transfer, ASIC can obtain injunctive relief under s1324 of the Act to stop this transfer and preserve the company's assets. These transfers could be charged under insolvent trading if it fulfils the criteria.

4.4 Disqualification

Directors who involve with consecutive liquidation of its managing company are exposed to risk of being disqualified. The term management will be interpreted in broad functional approach to maximise it potential coverage.[footnoteRef:80] Section 206D and 206F of the Act provides that a director may be disqualified by the court or ASIC for a certain period.[footnoteRef:81] Its non-compliance with the verdict would further breach its obligation under s206A (Disqualified person not to manage corporation).[footnoteRef:82] Section 130 and 130A of the Malaysian Companies Act 1965 are consistent with the stated s206D. However, Malaysia provides an additional option of automatic disqualification on top of court decision in s130A. It does not cause the director to vacate immediately, but the offender is obligated to resign its directorship.[footnoteRef:83] In short, it shows little amount of punitive feature while protection of stakeholders deems to be more prominent. [80: ibid] [81: ibid] [82: ALII, Corporation act 2001 s 206A] [83: Aishah Bidin (n 21)]

On the other hand, UKs statutory basis would falls under Company director disqualification act 1986. It provide extensive list of possible breach of duty that constitute disqualification. In fact, explanation in terms of unfit and misconducts are expressed explicitly. 5.0 Reformation of laws

Illegal phoenix activity tends to be indistinguishable from its legitimate counterpart and indeed the fraudulent intention is inherent difficult to find. The new regime needs to ensure that legitimate conducts are not captured inadvertently. Generally, UK and Australian perspective had moved on from punitive actions toward a more preventive route[footnoteRef:84]. Recommendation of law reforming has switched its attention to deterrent measures, as it could be the best for victims of PF. For instance, decline in financial status would immediately attract supervision from external party, instead of offering delinquent offenders a period of time to stack up liabilities and subsequently engaged PF.[footnoteRef:85] Besides improving insolvency law, directors duties play an important role in ensuring accountability among managements of company, including parties involved in liquidation process. Although there are provisions to address directors responsibility in compensating losses, there is further improvement available for. [84: Bryan Horrigan (n 72)] [85: ibid]

Malaysias legislator has commented the insolvency law should advance forward into a system where rehabilitative feature are taken in place before liquidation is initiated.[footnoteRef:86] The amendments are suggested to follow general objectives of insolvency law as stated in appendix 3. Alternatively, winding up will be regarded as last resort when it is determined to be no viability to restore back companys solvency in future prospect. An effective winding up regime needs to be done with minimum cost and delay, as acknowledged in Harmer Report of Australia.[footnoteRef:87] Resource funding is an important issue during the course of investigation and processing.[footnoteRef:88] [86: Gita Radhakrishna, Rethinking insolvency law in the Malaysian context (2012) 2012(2012) Journal of Southeast Asian Research] [87: CLRC (n 8)] [88: Aishah Bidin (n 21)]

The Malaysian corporate law itself is in need for reformation. Its major issue regarding insolvency is that, there are confusions and redundancy in relation with the Bankruptcy Act 1967.[footnoteRef:89] In contrast with Australia and UK, insolvency issue such as power and duties of liquidator as well as rights of secured creditors are not codified into provision, thus no statutory basis can be served as guidance in these matters.[footnoteRef:90] Other identified issue would be assessing the adequacy of statutory power for liquidator to recover asset in rise of void and voidable transaction during wind up process, such as s223, s224 and s293.[footnoteRef:91] [89: CLRC (n 8)] [90: ibid] [91: ibid]

Reviewers in AU have suggested their insolvency act to adopt a doctrine of inadequate capitalisation.[footnoteRef:92] An adequate capitalisation indicates that company has adequacy of capitals to repay debts when they fall due. Its insufficient of capital would contravene the doctrine and subjected to lifting on veil of corporate.[footnoteRef:93] [92: Australian government (n 9)] [93: ibid]

5.1 Director duty and disqualification

In fact, there are extensive list statutory law and corporate governance code regarding directors duty to address the obligation of directors in Malaysia. However, in address to phoenix activity, there are some recommendations to further support the provision in dealing with PF. For instance, legislator can introduce an effective disclosure regime, enhancing the shareholders rights to remedy corporate abuses as well as clarifying and reformulating directors duties[footnoteRef:94]. [94: CLRC, Reform trends in directors duties (CLRC secretariat, --)]

Specifically, director duty can be further widen in Malaysia CA 1965. Traditional perspective has prioritise the duty towards shareholders, company and creditors, where new amendments could include other stakeholders, such as employees[footnoteRef:95]. Besides that, role and function of director needs to be statutory clarified, whereby it state responsibilities of board of directors in supervising managements[footnoteRef:96]. Protection of honest director should be further extended to encourage proper person in taking directorship. One of the measures is to enact business judgement rule[footnoteRef:97]. [95: ibid] [96: ibid] [97: ibid]

In UK, the fraud advisory panel has layout a series of measure to improve the capabilities in abolishing fraud activities, including PF[footnoteRef:98]. The panel suggest the needs to further educate directors about their duties through issuing a copy of obligation material. This measure is primarily deal with awareness of director about their duties. Besides, panel recommend having better due diligence check, such as rigorous checks, and more gatekeeper function[footnoteRef:99]. For the criteria to disqualify directors, the panel sought for a more meaningful disqualification, through combination of proactive (checks on disqualified director acting as shadow director) and reactive (complaints on breach of orders) activities. Other measures such as indefinite disqualification could be applied as well[footnoteRef:100]. [98: Fraud Advisory Panel, The abuse of company incorporation to commit fraud (2012)] [99: ibid] [100: ibid]

Recommendation above shows a respond on the change of business environment, where traditional rigid structure could not address to a more dynamic and complex business structure that allows creative frauds. Its generally understood that range of substantial penalties are applicable for engaging in PF, however, its efficiency in prosecution remained at detection and enforcement. Hence, government needs to provide adequate resources to regulators, altogether with clear signals in executing PF. Furthermore, legislative reform should be structured to simplifies both detection and enforcement

6.0 Conclusion

Illegal phoenix activities are indeed a new terminology for Malaysias legislative body, as reflected from its limited resources in addressing this issue. In Malaysia, application of provision is often in reference with UK to obtain guidance in justifying unfamiliar cases. Both Australia and UK have provided a detailed explanation in engaging phoenix fraud, which are important for Malaysia to aware of this hidden issue. Despite lacking of extensive provision in relation with phoenix fraud, the primitive legislation framework that inherited from UK allows authority to curb this fraudulent activity to certain extent. According to Australia and UK cases, insolvency and director duty regime are remained relevant in condemning fraudulent intention in phoenix arrangement. Its main discussion remains in identification and prevention of phoenix fraud. Another concerned issue about phoenix fraud in Malaysia is that, no identified regime is able to aid LHDN in claiming tax liability in course of liquidation.

Lastly, in reference with reformation of laws, Malaysias company law is opened to variety of improvement to be made. The World Bank stated that companies act 1965 has started to shown its obsolesce, despite being drastically revamped in the 2006 and 2007 amendments[footnoteRef:101]. In fact, just having PF-relevant provision amended does not constitute adequacy in halting this illegal conduct, but a wide scope of legislative reform as well as authorities incentive to curb it with collaborated effort. [101: Shireen Muhudeen, Time to sweep away the cobwebs The Star Online (Kuala Lumpur, 20 July 2013)]

(4160 words)

7.0 Bibliography

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Angela Martin, Directors duties and phoenix companies (Allens Arthur Robinson, 2007)


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Australian Taxation Office, ATO sets sights on fraudulent phoenix activity (Australian Government, 2013)


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Accessed 2 June 2014.

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accessed 4 June 2014.Insolvency Act 1986


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8.0 Appendices

Appendix A

The report above approached the main issues through referring Australian perspective as the main basis. The reason being is that, Australians characteristic is similar to Malaysia, such as their inheritance of legislation from UK. Subsequently, UK will be used as comparison basis to identify the differences between both UK and Australia. UKs legislation as one of the oldest applicable law would provide valuable knowledge about divergence of modification made across period of time between the predecessor and inheritor.

Finally, Malaysia perspective would be evaluated in conjunction with the comparison made from above. Any disparity and excluded legislation will be discussed based on the available information acquired. The report will be concluded based on the observation made.

Appendix 1

Code, Rules and Regulation, and Statutory Acts that are chosen to discuss the issues of phoenix fraud (PF),

(Placement of the laws are based on priority)

United Kingdom

Insolvency Act 1986 (IA 1986)Companies Act 2006 (CA2006)Company Director Disqualification Act 1986

Australia

Corporation Act 2001 (CA2001)Taxation Administration Act 1953 (TAA)

Malaysia

Companies Act 1965 (CA1965)

Appendix 2

List of available option of external administration of liquidation during insolvency status (UK and Malaysia) [non-exhaustive list]

(United Kingdom)

(Malaysia)

Appendix 3

List of general objectives of insolvency law:

The facilitation of the recovery of companies which are in financial difficulties;

The suspension of legal actions by individual creditors through the creation of a moratorium;

The removal of powers of management of the company by its directors, even if directors retain their position as directors;

The avoidance of transfer and transactions which unfairly prejudice the general body of creditors;

Ensuring that there is an orderly distribution of companys assets;

The provision of a fair system for the ranking of claims against the company;

Making provisions for the investigation of the company failures and the imposition of liability of those responsible for the failure;

The protection of the public from directors who might in future engage in improper trading;

Maintaining the ethical standards and competence of insolvency practitioners;

The dissolution of a company at the end of the liquidation process.

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