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Illegal Phoenix Activity

This brief article examines illegal phoenix activity, including the definition, telltale signs, the negative impacts and how to avoid it.

What is it?

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 engaging in illegal phoenix activity. Conversely, when a company transfers its assets to a new company to evade its obligations to creditors, employees or the ATO, it is engaging in illegal phoenix activity.

Signs of Illegal Phoenix Activity

  •       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.

Serious Negative Consequences

  • 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.
  • May 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.
  • May result in creditors not being paid when an abandoned company goes into liquidation. This impact ripples in its effect and may lead to a loss of investor confidence in industry.
  • A phoenix company takes an unfair advantage over other companies because of its cheap access to assets and evasion of financial obligations.

The Australian Government’s Response

1. The Australian Phoenix Taskforce is a collaborative government taskforce which works to identify, prevent, and penalise phoenix activity in a range of ways. For example, the task force engages in the education of businesses, closing loopholes and the prosecution of offenders.

2. The recent introduction of compulsory director IDs assist government agencies in identifying directors responsible for phoenix activity and prevent further activity by these directors.  For a more detailed article on Director IDs, please see our dedicated article on this subject.

3. The Australian Securities and Investments Commission (ASIC) analyses data to monitor illegal activity and identify companies at risk.

4. Directors who engage in phoenix activity are also subject to a range of penalties including civil, such as disqualification and criminal, such as imprisonment.

5. Australian government organisations such as ASIC and the ATO have provided education for both the public and businesses. This education explains what constitutes illegal activity, 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 activity.
  • Companies should be cautious when appointing new directors and consider whether they have been involved with any other previously liquidated companies.
  • Researching government websites such as  ASIC and ATO websites.
  • Obtaining informed and professional legal advice.  The business lawyers at Brander Smith McKnight have extensive experience in all aspects of business law.  We pride ourselves on staying up to date with legislative changes and providing our clients with the best possible advice.

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