Avoiding Illegal Phoenix Activity
Illegal phoenix activity is the act of transferring a failed company’s assets to another company. As the second company does not maintain any obligations to the failed company’s creditors, the failed company may be able to avoid paying any outstanding debts, taxes, employee wages, superannuation, and other entitlements. On the other hand, legal phoenix activity takes the form of genuine and legal company restructuring.
Since 18 February 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) has been curbing illegal phoenix activity. However, with insolvency statistics showing a slow increase in recent periods, creditors, suppliers, contractors, and employees should all be aware of the risk of illegal phoenix activity.
I’m a creditor. What should I look out for?
As we spoke about in this blog, creditors should review whether debts are being paid, check if the debtor company has changed where are trading from, and look for any changes in company name, company directors, or payment entities. While some companies are genuinely engaging in restructuring, others may be avoiding their debt obligations. It may be prudent to undertake ASIC searches in order to confirm the solvency status of the other party.
I’m a director of a failed company. What should I look out for?
A lawyer can assist you in efficiently assessing company and debt restructuring options. It is best practice to go through proper channels and obtain advice when managing a failed company. If your company engages in illegal phoenix activity when making efforts to restructure, penalties can be severe. As a director, you may be liable for large fines and up to 15 years’ imprisonment.
When engaging in restructuring, ensure that any company assets are only transferred at fair market value or the best reasonably obtainable value. Fair market value refers to what a knowledgeable and willing buyer would pay, whereas the best reasonably obtainable value is only applicable when the company faces a legitimate urgency to sell assets and thus must accept a below-market value. However, it is best practice to obtain a valuation for assets being sold, administer a sales campaign, and keep a detailed record of any relevant sale decisions.
How can a lawyer protect my interests?
If you are a creditor, a lawyer can undertake all due diligence searches on your behalf. A lawyer can also assist in protecting your assets or commencing any proceedings on your behalf if necessary. If you are restructuring your business, a lawyer can assess fair market value and best reasonably obtainable value. A lawyer can assist with valuation and thus speed up the restructuring process. A lawyer can also help you ensure that your employee and other entitlements are paid out, protecting you from further claims.