While industry bodies support the Government's proposed regulatory amendments to accelerate the wind-up of so-called 'phoenix' companies and claim the issue is not a major concern for financial planners, a senior lawyer has warned the Government move has not gone far enough in addressing financial planning issues.
According to the parliamentary secretary to the Treasurer, David Bradbury, the practice known as 'phoenix activity' allows insolvent companies to simply set up a new business using a similar company name, sometimes located in the same premises and with the same staff and clients.
The 'Phoenixing Bill', released for public consultation in December, will give the Australian Securities and Investments Commission (ASIC) the administrative power to wind up abandoned companies and to facilitate the online publication of notices and gazettes relating to external administrations, Treasury stated.
Directors involved in these activities exploit the concept of limited liability in the Corporations Act 2001 which stipulates that when a company fails, those behind the company (including directors and shareholders) are not liable for the company's debts.
Association of Financial Advisers chief executive Richard Klipin said such fraudulent activity is not something that he has come across among financial planning dealer groups. Although he believes the provisions in the current Act are sufficient to protect financial advisers, he supports the move to amend the Act.
"Phoenix companies tend to leave a trail of devastation, from creditors to employees – [so] anything that goes to supporting the community is important," he said.
In conjunction with the 'Phoenixing Bill', the 'Similar Names Bill' was also released for consultation and is intended to impose personal liability upon directors for the debts of phoenix companies.
Steve Harris, commercial general counsel with law firm Maurice Blackburn, argues that this bill is the real concern, as it does not go far enough in preventing phoenixing in the financial planning industry.
Harris said the bill is strictly limited to similar names, but quite often the issue is that a phoenix company sets up under an entirely new name and continues the business of the failed company.
"It's a serious failing of the bill. Quite often a rogue financial planner will use an entirely new name because the old name has been tainted by previous unlawful activities," he said.
The amendments needed to take into account the directors, employees and clients of the new financial planning practice rather than just the credit history, he said.
Harris added that the debts of the failed company remain unresolved while the directors of the new company remain personally liable for the company that is trading under a similar name.
Klipin said that breaches of ASIC's regulatory guidelines and those set out in the Australian financial services licence were more prevalent than phoenixing. All dealer groups must have a very extensive risk management framework before they allow financial advisers to come under their authority, and all advisers work to an approved product listing that operates to filter such companies, he added.
The Financial Planning Association has not made a submission to Treasury on the proposed amendments. It declined to comment on the effectiveness of such legislative changes, indicating that 'phoenixing' was not a major concern for the industry body given the debate over the Future of Financial Advice draft legislation.
