Illegal Phoenix Activity

21 February 2022 in Business Law, Civil and Commercial Litigation and Law

What is Illegal Phoenix Activity?

Illegal phoenix activity is when an existing company transfers its current business and assets to a new company to avoid paying creditors, taxes, and employee entitlements.  A company may engage in illegal phoenix activity if they are facing liquidation or experiencing financial hardship.  Phoenix activity varies in the level of complexity and sophistication.

In Australia there are various laws and agencies which combat illegal phoenix activity. There are significant criminal and civil penalties for engaging in illegal phoenix activity.

Illegal versus Legal Phoenix Activity

There is an important distinction between illegal and legal phoenix activity.

A company which is legitimately restructured or has assets removed from it, without the intention of evading its obligations to its creditors is not likely to be engaging in illegal phoenix activity. It is important when engaging in a legitimate company restructure, that directors comply with their legal duties.

However, where a company transfers its assets to a new company to evade its obligations to creditors, employees or the ATO, it will be classified as illegal phoenix activity.

Signs of Illegal Phoenix Activity

There are various signs which may indicate a company is engaging in illegal phoenix activity, including where:

•       A company cannot or does not pay its debts
•       A company’s assets are transferred to another company for less than their market value
•       The same people involved in managing an old company are involved in managing a new company
•       A new company conducts the same business as previous similar company
•       A new company shares many characteristics with a previously existing company
•       Employees do not receive payslips or their other entitlements such as superannuation.

The Negative Impacts of Illegal Phoenix Activity

Illegal phoenix activity can have serious negative consequences.

• Illegal phoenix activity negatively impacts government revenue because of the tax obligations companies avoid when engaging in illegal phoenix activity. This derives the community of the potential benefit of this money.
• Illegal phoenix activity can also deny employees access to their entitlements such as their pay and superannuation. Further, these entitlements need to be subsidised by the government. Similarly, a company’s sub-contractors are also unable to access payment which they are entitled to from the previous company.
• The consequence of illegal phoenix activity is that creditors cannot be paid when an abandoned company goes into liquidation. This impact ripples in its effect and may lead to a loss of investor confidence in a certain industry where illegal phoenix activity becomes rampant.
• A phoenix company takes an unfair advantage over other companies because of its cheap access to assets and evasion of financial obligations.

Responding to Illegal Phoenix Activity

Australia has developed a multifaceted and varied response to illegal phoenix activity, some key responses to illegal phoenix activity are discussed as follows.

The Australian Phoenix Taskforce is a collaborative government response to illegal phoenix activity. Broadly, the taskforce works to identify, prevent, and penalise illegal phoenix activity in a plethora of ways. For example, the task force engages in the education of businesses, closing loopholes which enable phoenix activity and prosecuting offenders.

The recent introduction of compulsory director IDs has also been used to combat illegal phoenix activity. Director IDs can assist government agencies in identifying directors responsible for illegal phoenix activity.

The Australian Securities and Investments Commission (ASIC) analyses data provided from various sources to monitor illegal phoenix activity and identify companies at risk of engaging in illegal phoenix activity.

Directors who engage in phoenix activity are also exposed to various types of penalties. These include both civil penalties and criminal penalties such as imprisonment and disqualification.

Australian government organisations such as ASIC and the ATO have provided education for both the public and businesses about illegal phoenix activity. This education relates to explaining what phoenix activity is, how to avoid it, how to spot it and the consequences of engaging in it.

Avoiding Illegal Phoenix Activity

• Directors should approach dealings with business advisers with caution where advice relates to the financial problems of a business and its potential restructuring. Relying on the poor business advice could result in a company unknowingly engaging in illegal phoenix.
• Companies should be cautious when appointing new directors and consider whether they have been involved with any other previously liquidated companies.
• Researching illegal phoenix activity is also an effective way for companies to avoid engaging in such conduct.  The ASIC and ATO websites can help in this regard.

Obtaining legal advice is also an effective way to avoid illegal phoenix activity.  The experienced business lawyers at Brander Smith McKnight are happy to provide advice and assistance.

We are conveniently located in Sutherland, Parramatta, Wollongong and Sydney CBD.

Reporting Illegal Phoenix activity

Where illegal phoenix activity is suspected, it is important to report it to the relevant authorities.  More information about the reporting illegal phoenix activity can be found on the ASIC and ATO website.