Beware of Phoenix Activity


WHAT IS PHOENIX ACTIVITY?

Illegal phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements.

This illegal phoenix activity impacts the business community, employees, contractors, the government and environment, including:

* non-payment of wages, superannuation and accrued employee entitlements

* getting an unfair competitive advantage over other businesses

* non-payment of suppliers

* loss of government revenue and increased monitoring and enforcement costs

* avoidance of regulatory obligations.

Directors involved in this activity transfer the assets of the existing company to the new company without paying fair or market value, leaving any debt with the existing company.

After transferring the assets, the director usually places the existing company in liquidation, leaving no assets to pay creditors.

The new company continues the business. It is often managed by the same directors and operates in the same industry. By engaging in this illegal practice, directors intentionally avoid paying debts owed to creditors, employees and statutory bodies (e.g. the Australian Taxation Office). Illegal phoenix activity can involve serious criminality, including breaches of director's duties or fraudulent concealment/removal of assets under the Corporations Act 2001. Penalties include large fines and imprisonment for company officers (directors and secretaries).

The key difference between a legitimate business rescue and illegal phoenix activity is the director's intentions to avoid paying debts and liabilities.

Illegal phoenix activity severely impacts those owed money and gives these business operators an unfair competitive business advantage.

Not all company failures involve illegal phoenix activity. Genuine company failures do occur. Where directors responsibly manage a business but it fails, that business may continue after liquidation under another corporate entity without, necessarily, involving illegal phoenix activity.

Key characteristics of illegal phoenix activity can include:

  • the company fails and cannot pay its debts

  • sometimes the company changes its name to its Australian Company Number (ACN) and a new company is registered, often with a similar name to the old company

  • the directors or former directors engage in conduct that dishonestly denies unsecured creditors access to the company's assets – usually by transferring the assets from the old company to the new company for no consideration or less than the market value

  • the new company continues to manage the business by using some or all of the assets of the old company

  • parties involved in managing the old company control the new company – either as the directors or 'controlling minds'.

Key players can include:

  • Pre-insolvency adviser: Untrustworthy advisers maintain a network of 'friendly' professionals and encourage illegal phoenix activity, often by cold-calling companies in trouble. The pre-insolvency industry is not regulated and advisers can have varying qualifications and experience

  • Valuer: A 'friendly' valuer provides a low valuation for the company’s assets

  • Liquidator: A 'friendly' liquidator who avoids their responsibilities (for example, by not investigating, recovering assets or reporting their findings to ASIC and creditors)

  • Dummy directors: The new company operators may include relatives/associates or someone with no knowledge of the company, who is often referred to as a 'director for hire'

  • Phoenix operator: A 'controlling mind' who evades tax and other obligations through the deliberate liquidation of related corporate trading entities. This behaviour is often systematic and cyclic

The law holds each of the key players equally responsible and may be subjected to the same penalties if it is proved that they aided, abetted, counselled or procured a director to engage in illegal phoenix activity.

An example of illegal phoenix activity can be found here

Phoenix activity doesn't just impact those people directly affected. It deprives the whole community of necessary funds that could have contributed to hospitals, roads, education and other essential services.

Here are a few simple online checks that you can do to make sure that you are not engaging with an illegal phoenix operator.

Check the company's:

* ABN details and status by using the ABN Search

* Registration details by searching the register of companies and organisations with ASIC here

* Director status by searching the register of banned and disqualified here

If you suspect illegal phoenix activity, report it to the ATO via their Tax Evasion Reporting Form

Information obtained via www.ato.gov.au and www.asic.gov.au. Image supplied via www.asic.gov.au

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