Recognising Illegal Phoenix Activity

Illegal phoenix activity occurs when a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes, creditors and employee entitlements. Typically, the business assets of an existing company are sold or transferred for minimal or under market value to the new entity. In February of this year, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) came into force to combat illegal phoenix activity.

Illegal vs Legal Phoenixing

There is such thing as legal phoenix activity. This may occur when there has been a genuine business failure and there has been a legal restructure of the company. A key point to recognise is the transfer of assets in a legal phoenix which may distinguish whether activity is considered a legal or illegal phoenix. If a business is legally restructuring, an independent and proper valuation of assets should take place and transfer of assets from one company to another should be for the true market value.

Warning signs that a company director may be phoenixing

For creditors of a company, there may be some red flags which can indicate that a director is engaging in illegal phoenix activity. These include the following:

  • Debts are not being paid.
  • The new company that is formed is trading from the same premises as the old company.
  • The company has recently changed name or directors.
  • The company is requesting payments be made to a different entity
  • Employees of the company are not being paid.
  • The directors are previously involved with liquidated entities.

Why is it important to be aware of phoenixing?

Phoenixing can have broad impacts on creditors, suppliers, employees, contractors and the wider community. This is predicated on defeating creditors and allows companies to avoid paying debts, taxes and other entitlements. The wider implications of phoenixing include non-payment of employee wages, superannuation and accrued entitlements when a company goes into liquidation, the company is provided with an unfair competitive advantage over other businesses, suppliers are not paid, and the company avoids regulatory obligations.

Consequences for illegal phoenix activity

Illegal phoenix activity can result in directors breaching their duties under the Corporations Act 2001 and company directors can be found to have committed fraud. Penalties can include large fines and up to 15 years imprisonment for company officers found to have engaged in illegal phoenixing.

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