Restructuring & Insolvency
What is illegal Phoenix Activity?
Illegal phoenix activity is where a new company is created to continue the business of an existing company that has been deliberately liquidated, or abandoned, to avoid paying outstanding debts, including taxes, creditors, and employee entitlements.
This illegal practice usually happens when company directors transfer the assets of an existing company to a new company without paying market value, leaving the liabilities with the old company. Once the assets have been transferred, the old company is placed in liquidation either voluntarily or by Court order via a winding application by a creditor (often the Australian Taxation Office (ATO)). When the liquidator is appointed, there are no assets remaining and therefore creditors cannot be paid.
The ATO and the Australian Securities and Investments Commission (ASIC) are targeting phoenix activity and funding liquidators to investigate such activity to report back to the ATO and ASIC to unwind and take legal action for such practices.
What if I want to sell my business but there will be a shortfall of funds to pay creditors?
Phoenix activity is where assets are transferred for no consideration (no payment received) or inadequate consideration.
It is not considered phoenix activity where a proper sale process has been followed yet the amount received is unable to fund all creditors. A proper sale process may include:
- a company broadly advertises the business for sale;
- the company seeks and reviews all offers – i.e. not closed to only receiving an offer from a related party;
- the sale process is documented;
- the sale process is open to the wider public; and
- the best sale price is chosen for the business.
The best sale price may not necessarily be the highest dollar value, but whatever best suits the company and its creditors at the time of the sale. For example, the company may choose to accept a lower value sale price where the due diligence and settlement date occurs quicker in comparison to a higher value sale price.
Can I buy the business out of liquidation?
Yes. The Liquidator will ordinarily go through a sale process and as long as your offer is the most desirable, you may purchase the business and assets out of liquidation into a new entity. This is not considered phoenix activity.
Can I start up a new business even though my previous company failed?
Generally yes, unless you are banned from being a director by either:
- an ASIC banning order; or
- you are currently bankrupt.
in which case you are unable to be a director of a company.
You are entitled to earn a living and use your skills to earn that living. Stamping out phoenix activity is not preventing you from doing so.
However, certain items are reviewed when considering if the assets of one company are utilised to start another, such as:
- whether the intellectual property has been moved or duplicated, for example, training manuals, policies and procedures, template reports or letters. This type of activity may be considered phoenix activity, as an asset of the old company is being utilised by the new company;
- whether customers of the company in liquidation have been moved prior to or after liquidation, and if so, how were they moved? For example, if those customers were courted prior to the liquidation to move to a new company, then this may be considered phoenix activity as an asset is being moved; and
- if customers have moved from company X to company Y, then how did that move occur and how has it been treated? For example, if a customer has moved to the new company, company Y, but the debts relating to that customer sit within company X, then this may be considered phoenix activity.
What if my advisor recommends something that sounds like phoenix activity?
ASIC’s ‘untrustworthy advisor’ warnings signs include:
- unsolicited contact;
- reluctance to provide their advice in writing;
- suggestions of destroying books and records or withholding or delaying providing them to the company’s liquidator, if appointed;
- suggestions of transferring company assets into another company without paying for them;
- Recommending using a ‘friendly’ liquidator to wind up your company – i.e. a liquidator that will not undertake proper investigations or proffer that he will not take any action against a director for breaches of the Corporations Act 2001.
ASIC’s website warns directors from taking this tainted advice, which might cause them to break the law or breach director duties and can result in “large fines or even imprisonment”. Further, taking ‘bad’ advice “can damage the claims of the company’s creditors”.
Any such activity can be reported to ASIC or the ATO.
If your business is experiencing financial difficulty, contact us to arrange a free, no-obligation discussion to give you clarity on your position and options available.