A Phoenix – A Flaming (Mythical) Bird, or a Flaming (Illegal) Mess…
Like the mythical bird, phoenix companies are reborn and rise out of the ashes of their insolvent predecessors. However, how they are reborn is important.
On 11 August 2016, the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC) made a very public statement when 120 officials raided the offices and homes of 13 professional advisors across Melbourne and the Gold Coast. It is alleged these advisors were promoting illegal phoenix activity to their clients.
Whether charges from these raids are laid or, ultimately, successful, it is clear that both the ATO and ASIC are taking illegal phoenix activity very seriously.
What is illegal phoenix activity?
According to ASIC, illegal phoenix activity involves the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements. The directors leave the debts with the old company, often placing that company into administration or liquidation, leaving limited or no assets to pay creditors. The new company then continues to trade a similar business, usually with the same directors, however directors who undertake illegal phoenix activities, normally, breach a number of:
- Specific duties under the Corporations Act 2001 (Act); and
- General common law duties that relate to their fiduciary obligations.
These breaches, usually, relate to deliberate arrangements to avoid liabilities and/or directors improperly using their position. Depending on the severity of the breaches, directors can be made financially liable, banned from acting as a company director and/or face criminal conviction.
Can phoenix activity be legal?
Not all phoenix activity is illegal. There are mechanisms available under the Act that can result in a business being restructured and saved — either under their existing form, or through a new corporate structure. However, the affairs of the existing company must be dealt with by an external administrator in a transparent manner. Furthermore, there cannot be any intention to defraud creditors, including the ATO.
Directors who have acted properly, but find themselves in a genuine corporate failure, should have nothing to fear.