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Identifying a Phoenix Company

31 August 2017

The term ‘phoenix company‘ is often brandished about when a business continues despite a corporate collapse, but what defines a phoenix company and when does it represent illegal activity.  Illegal phoenix activity is a serious crime that can result in imprisonment of a company’s officeholders.  Its damage is widespread and affects employees, businesses (creditors) and Government agencies including the Australian Taxation Office.  Because of increasing phoenix activity, the ATO and ASIC together with the Fair Work Ombudsman and the Department of Employment (and a number of other government agencies) have developed a Phoenix Taskforce in an attempt to curb illegal phoenix activity.

What is phoenix activity?

A phoenix company is a company that has been registered to take over a failed or insolvent business of another company.  The new company rises from the remains or ashes of the failed company usually with the same (or related) directors.  The assets of the old company are transferred to the new company for little or no consideration.  The new company continues to operate the business, usually with the same assets and employees.

Not all phoenix companies represent illegal fraudulent actions.  Sometimes, despite a Director’s best efforts, a business will fail and the company will end up in Liquidation.  Generally, a Director is protected from personal liability of a failed company’s debts, provided he or she acted in accordance with the company’s best interests by placing the company into Administration or Liquidation.  A Liquidator will seek to realise the available assets of the company for the benefit of creditors.

When is phoenix activity illegal?

Illegal phoenix activity occurs when a company suffers financial distress and cannot (or is unwilling to) pay its debts, and the directors defeat the creditors’ interests by transferring the company’s assets to a newly registered company for little or no consideration, prior to placing the old company into Administration or Liquidation.  The old company has been left with little or no assets for a Liquidator to distribute to creditors, including employees and the Australian Taxation Office.  Meanwhile, the new company continues operation of the business and usually has the same (or related) directors, uses the same assets and employees. On the surface it appears business as usual and often a creditor may be unaware that they are dealing with a different entity. 

The intention of illegal phoenix activity is to avoid paying creditors of the old company.

The key factors that distinguish an illegal phoenix company from a genuine company failure are:

  • A company fails and is unable to pay its debts;
  • The company’s actions reflect a deliberate avoidance of paying liabilities: allowing the company to incur debts it was unable or had no intention of paying and/or by stripping the company of any assets prior to Liquidation;  and
  • A new company commences (usually within 12 months of the original company’s failure) which uses all or some of the former company’s assets, is controlled by the same Director or Manager or their relatives and operates a similar business or in a similar industry to the previous company.  Often the old company changes its name prior to Liquidation (sometimes to its A.C.N.), and the new company is incorporated with the same (or similar name) as the old company.

Consequences

ASIC and the ATO are closely monitoring illegal phoenix activity in an attempt to prohibit advisers who promote and facilitate this type of activity.  Illegal phoenix activity causes detriment to employees, businesses and government agencies and it has been estimated it costs the Australian economy between $1.78 and $3.19 billion annually (Phoenix activity: sizing the problem and matching solutions, Fair Work Australia).  Illegal phoenix activity is a serious crime and may result in company officers being imprisoned.

In an attempt to curb illegal phoenix activity, the ATO have been conducting site visits without notice, and ASIC have a number of initiatives including:

  • Funding Liquidators to prepare reports to assist ASIC in taking enforcement action;
  • Disqualifying Directors from managing corporations where they have been involved in two or more failed companies within the past seven years;
  • Liquidators Assistance Program to assist Liquidators in securing books and records of companies in administration and ensuring that directors comply with their legal obligations, or face court action.
  • Identifying and deterring illegal phoenix activity – ASIC launched a surveillance initiative in July 2013 and are monitoring individuals who are current directors of new companies who have been directors of a company that failed, or were a director of the company within 12 months of the company being wound up.

What to do if phoenix activity suspected

If you are a creditor of a company and you suspect a debtor company is involved in illegal phoenix activity, you can report such conduct to the company’s Liquidator where one is appointed.  The Liquidator will conduct investigations to submit a statutory report to ASIC which may assist ASIC to take enforcement action or to disqualify the directors.

Action

If you are concerned about a debtor company that may be involved in illegal phoenix activity but has not yet been wound up, contact our experienced team at Rodgers Reidy for a confidential discussion in relation to the best course of action for your specific circumstances.

Similarly, if you are director of a company that is experiencing financial difficulty, and you would like to assess your options and ascertain whether it is possible to restructure and save the business, contact Rodgers Reidy for a confidential discussion and advice for your specific circumstances.  Rodgers Reidy are experienced insolvency practitioners who can provide you with guidance to obtain the best possible outcome for your business while fulfilling your obligations as a Director.

Further resources:-

1.       ASIC Information Sheet 151 –ASIC’s approach to enforcement

2.       ASIC Information Sheet 74 – Voluntary Administration: A guide for creditors

3.       ASIC Information Sheet 75 – Voluntary Administration: A guide for employees

4.       ASIC Information Sheet 45 – Liquidation: A guide for creditors

5.       ASIC Information Sheet 46 – Liquidation: A guide for employees

6.       ASIC Guide for Small Business Directors

7.       ASIC Report 513: Enforcement Outcomes, July to December 2016

8.       ATO media release, 4 April 2017

9.       Phoenix Activity: Sizing the Problem and Matching Solutions, Fair Work Ombudsman, June 2012

 

 

 

 

 

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