Illegal Phoenix Activity

Ahmad Subar Bin Syed Sahir

Table of Contents

1.0 Introduction .......................................................................................................................... 1
2.0 Insolvency and Liquidation.................................................................................................. 2
2.1 Insolvency ........................................................................................................................ 2
2.2 Transactions under insolvency ......................................................................................... 3
2.3 External Administration ................................................................................................... 4
2.3.1 Voluntary Administration (Australian) ..................................................................... 5
2.3.2 Pre-pack administration (UK) ................................................................................... 5
2.3.3 Malaysian approach .................................................................................................. 5
2.4 Just and Equitable grounds (Wind Up) ............................................................................ 6
2.5 Phoenix Amendment (Australian) ................................................................................... 6
2.6 Similar Name Bill (Australian) ........................................................................................ 7
3.0 Taxation ............................................................................................................................... 8
3.1 PAYG (W) (Pay-as-you-go (withholding)) ..................................................................... 9
3.2 DPN (Director Penalty Notice) ........................................................................................ 9
3.3 Malaysia and UK ............................................................................................................. 9
4.0 Directors Duties ................................................................................................................ 10
4.1 Duty of good faith .......................................................................................................... 10
4.2 Use of position and information .................................................................................... 11
4.3 Liability on insolvent trading and asset transfer ............................................................ 13
4.4 Disqualification .............................................................................................................. 13
5.0 Reformation of laws ........................................................................................................... 14
5.1 Director duty and disqualification ................................................................................. 15
6.0 Conclusion ......................................................................................................................... 17
7.0 Bibliography ...................................................................................................................... 18
8.0 Appendices ......................................................................................................................... 25
Appendix A .......................................................................................................................... 25
Appendix 1 ........................................................................................................................... 26
Appendix 2 ........................................................................................................................... 27
Appendix 3 ........................................................................................................................... 29






1 | P a g e
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.
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).

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).















1
Department of the prime minister and cabinet (DPMC), Taxation changes to address fraudulent phoenix activity (2011)
2 | P a g e
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.
2
Fraudulent phoenix activities are
associated with insolvency as the company always remain with minimum resources that
cannot fully repay the piled debts.
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.

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.
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.
5

In fact, UKs legislation has prominent influence across commonwealth countries, which are
in relation to both Australia and Malaysia.

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.
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.
7
In
fact, Malaysians statutory law that favours liquidation proceedings during insolvency

2
Wests Encyclopedia of American Law (2nd edn, 2008)
3
Australian Securities & Investment Commission (ASIC), Small business illegal phoenix activity (ASIC, --)
4
PWC (London), Insolvency in brief (PWC, 2009)
5
ibid
6
Roman Tomasic, Insolvency law in East Asia (Ashgate Publishing 2013) 321
7
ibid
3 | P a g e
facilitates creditors to recover debts before sinking into a greater one.
8
Hence, it might serve
as deterrent of phoenix arrangement at certain extend.

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.
9


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.
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).
11
S588FD describes forms of fraudulent transaction, where its
intent is to defeat, delay or interfere with the rights of creditors.
12
In fact, law for insolvent
trading in Australia is stricter than those in UK.
13


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).
14
Breach of fraudulent trading
under insolvency in UK, however, could be justified just by single transaction.
15
Nonetheless,
the legal action is depending on liquidators initiation, and its interest would be in conflict
since pursuance of action is personally financed.
16
Possible fraudulent offences are defined in

8
Secretariat to the Corporate Law Reform Committee (CLRC), Reforming the Corporate Insolvency Regime (SSM, --)
9
Australian Government, Action against fraudulent phoenix activity proposal paper (Australian government, 2009)
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
14
Lorraine Conway, Phoenix trading (parliament UK, 2012)
15
ibid
16
PWC (London) (n 4)
4 | P a g e
s206 s211 of IA1986.
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).
18

Section 423 provides for creditor to claim their rights on undervalued transaction that
intended to defraud them.
19


However, in Malaysia, no specific provision is invoked for wrongful trading.
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.
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.
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.
23
Liquidator that found director has undergone fraudulent
trading can invoke s304 to recover debts.
24
However, the interpretation only agrees to breach
when all creditors are being defrauded, while attempts in proving intention is difficult as
well.
25


2.3 External Administration

During insolvency, external administration or liquidators will come in place to
oversee the company (Appendix 2).
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.



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)
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)
26
Malaysia institute of accountants (MIA), Insolvency: Learning the essentials of corporate liquidation ; PWC, Insolvency in brief
5 | P a g e
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).
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.
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.
29


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.
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.
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.
32
It is an express package for phoenix arrangement,
as well for its vulnerability towards PF.

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.
33
Instead, corporate restructuring or

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)
30
Nicholas Crouch and Shabnam Amirbeaggi, '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
Nicholas Crouch and Shabnam Amirbeaggi (n 30)
33
CLRC, A consultative document (SSM, 2007)
6 | P a g e
liquidation is applied in Malaysian context.
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).
35

This ability is said to be derived from administration in Australia, UK and US.

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 of Taxation 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.
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.
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.
38


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.
39
Besides, ASIC can reject voluntary deregistration if liquidation is
considered as more appropriate course of action.
40
It is intended to solve the issues of
dormant company with unpaid debts, and when no creditor seeks the appointment of a

34
ibid
35
Lawyerment, Danaharta (Lawyerment, 2011)
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), --)
39
Murdoch Lawyers, Company law reform update ASICs fight against phoenix companies continues (Murdoch Lawyers, 2013)
40
ibid
7 | P a g e
liquidator. In addition, it allows the company's employees to qualify for GEERS.
41
The major
changes made are summarised as in figure below,
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.
42


Figure 1: Major changes on Corporations Amendements (Phoenixing and other measures)
Act 2012
Liquidators 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.
43
This power would help ASIC in shifting certain responsibility in detecting and
prosecuting phoenix activity to a liquidator.
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.

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.
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.
46


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

41
Orla Mccoy (n 36)
42
Murdoch Lawyers (n 39)
43
ibid
44
Helen Anderson (n 10)
45
ibid
46
ALII, Corporation Act 2001 Part 5.7B Div. 2
8 | P a g e
switch of cheques payable from precedent company into the new companys bank account.
47

It should be noted that this transaction is chargeable under Corporations Act s 182(1) when
its found to be illegal.
48
The Corporations Amendment (Similar Names) Bill 2012 is enacted
to restrict the use of same or similar name of its precedent company.
49
In fact, it is originated
from s216 (Prohibited name), under UKs insolvency law 1986.
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.
51
UK
approached similar by testing whether the name would be so likely that external stakeholder
deemed they are associated.
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.

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.
53



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.
53
Australian Taxation Office (ATO), ATO sets sights on fraudulent phoenix activity (Australian Government, 2013)
9 | P a g e
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.
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.
55


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.
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.
- 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 DPN
3.3 Malaysia and UK

Similarly to DPN, UKs HM Revenue and Customs (HMRC) approach phoenix
activity by issuing Personal Liability Notice (PLN).
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

54
DPMC, Countering Fraudulent Phoenix Activities by Company Directors (2011)
55
Helen Anderson (n 10)
56
Australian Government (n 9)
57
HM Revenue & Customs (HMRC), NIM12204 class 1: personal liability notices: what is a phoenix company? (HMRC, --)
10 | P a g e
risk of intending to neglect payment of PAYE (PAYG-W for Australia) or NICs.
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.

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.
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.

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.
60


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.".
61


58
HMRC, Review of HMRCs power, deterrents and safeguards (HMRC, --)
59
Angela Martin, Directors duties and phoenix companies (Allens Arthur Robinson, 2007)
60
ibid
61
ibid
11 | P a g e

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.
62
For Malaysian context, section 132(1) requires director to act in good faith as well as
execute power for a proper purpose.
63
The proper purpose is similar to those stipulated in
use of position and information.

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.
64
It is consistent
with s180 of the Act regarding duty of director to act with care and diligence.
65


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.
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.
Grove v Flavel.
Determine the term improper should be interpreted by case basis.
67


R v Heilbronn,
Directors involved in PF could be sentenced through breach on improper use of position as
officer.
68


Cook v Deeks
The authority for the proposition that directors and officers cannot exploit an opportunity or

62
Company Law Club, Directors duties
63
Sujata Balan, Reform of the law relating to directors duties in Malaysia (2011) 4(1) SEGi Review
64
Angela Martin (n 59)
65
ibid
66
ibid
67
ibid
68
Helen Anderson (n 10)
12 | P a g e
information that belongs to the company without the prior approval of the company.
69


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.
70


Jeffree v National Companies and Securities Commission
It 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.
71

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.
72
The
law highlights the duty of director in ensuring interests of company are not impaired.
73

However, Australian perceives the duties as loyalty toward the company.
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.

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

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

69
Angela Martin (n 59)
70
ibid
71
--, Case note (1989) 17 Melbourne University Law Review
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
75
SSM, Companies act 1965 s 132
13 | P a g e
(b) any additional knowledge, skill and experience which the director in
fact has.
76


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.
77
Avoidance provision sets out breach by diminishing companys asset in
relation to bring prejudice against creditors.

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.
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.
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.

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.
80
Section 206D and 206F of the Act

76
Sujata Balan (n 63)
77
Hasani Mohd Ali (n 20)
78
ALII, Corporation act 2001 s 588G
79
Bryan Horrigan (n 72)
80
ibid
14 | P a g e
provides that a director may be disqualified by the court or ASIC for a certain period.
81
Its
non-compliance with the verdict would further breach its obligation under s206A
(Disqualified person not to manage corporation).
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.
83
In short, it shows little amount of punitive feature while protection of
stakeholders deems to be more prominent.

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
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.
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.


81
ibid
82
ALII, Corporation act 2001 s 206A
83
Aishah Bidin (n 21)
84
Bryan Horrigan (n 72)
85
ibid
15 | P a g e
Malaysias legislator has commented the insolvency law should advance forward into
a system where rehabilitative feature are taken in place before liquidation is initiated.
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.
87
Resource funding is an important issue during the course of
investigation and processing.
88


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.
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.
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.
91


Reviewers in AU have suggested their insolvency act to adopt a doctrine of
inadequate capitalisation.
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.
93


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

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)
89
CLRC (n 8)
90
ibid
91
ibid
92
Australian government (n 9)
93
ibid
16 | P a g e
shareholders rights to remedy corporate abuses as well as clarifying and reformulating
directors duties
94
.

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
95
. Besides that, role and
function of director needs to be statutory clarified, whereby it state responsibilities of board
of directors in supervising managements
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
97
.

In UK, the fraud advisory panel has layout a series of measure to improve the
capabilities in abolishing fraud activities, including PF
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
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
100
.

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


94
CLRC, Reform trends in directors duties (CLRC secretariat, --)
95
ibid
96
ibid
97
ibid
98
Fraud Advisory Panel, The abuse of company incorporation to commit fraud (2012)
99
ibid
100
ibid
17 | P a g e
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
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.

(4160 words)










101
Shireen Muhudeen, Time to sweep away the cobwebs The Star Online (Kuala Lumpur, 20 July 2013)
18 | P a g e
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21 | P a g e
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25 | P a g e
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.




















26 | P a g e
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)




























27 | P a g e
Appendix 2

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


(United Kingdom)
28 | P a g e

(Malaysia)





























29 | P a g e
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.