The term ‘Phoenix’ refers to the mythical creature which, upon its death, is reborn from the ashes of its predecessor. By analogy, this describes a new business becoming ‘reborn’ out of the ‘ashes’ of a defunct business. This can involve a number of different practices, but essentially sees a director cycle productive business assets through a series of companies in a deliberate effort to avoid liabilities including tax, or trade creditors
It is worth noting however, that whilst there is a common understanding of this general analogy, there are no express definitions found in any Australian laws.
The Australian Securities and Investment Commission (‘ASIC’) describes phoenix activity as conduct that meets the following criteria:
Where an entity:
The Corporations Amendment (Phoenixing and Other Measures) Act 2012 was recently enacted. The Amendment provides ASIC with increased power to wind up companies suspected to be engaged in phoenix activity.
ASIC issued a press release in September 2013 announcing it was stepping up surveillance of illegal phoenix activity. The release states (amongst other things):
‘Illegal phoenix activity has far reaching and unfair consequences’.
‘As part of the surveillance program, ASIC will focus on the building and construction, labour hire, transport, and security and cleaning industries.’
‘We are looking at failed companies, mostly within the small business sector, from July 2011 onwards where there have been allegations of illegal phoenixing ,’ said ASIC commissioner Greg Tanzer.’
To read the full ASIC press release, please click here.
The real risk associated with phoenixing for directors lies in the transfer of assets from a “dead” company to the company that is “reborn”. The issue here surrounds the consideration that follows the transfer more so than the transfer itself. The targeted phoenixing that may result in serious penalties being imposed on an individual has usually involved the undervaluation of the former company’s assets.
This risk is particularly high when a company is undergoing a restructure or pre-packing. Pre-packing is essentially when the core business assets are sold for fair market value to a new company, often a related entity.
It is imperative for any business considering a pre-packaged insolvency arrangement to take particular care and obtain advice from a lawyer.
Penalties and Liability
Should a director become involved in unlawful phoenixing activity, the individual is likely to breach a number of director’s duties under the Corporations Act 2001 (the ‘Act’) and general law.
The remedies that can be claimed against the director are varied and include:
Additionally, if the breach is reckless or dishonest, criminal liability can be imposed upon which further fines can be ordered, even imprisonment.
Furthermore, a director can be disqualified from managing a company for a period of up to ten (10) years.