Phoenix Activities: Spotting the Warning Signs vs. Legitimate Business Rescue
Companies in financial difficulties can be extremely stressful for officeholders, especially in circumstances where they cannot meet the company’s payment obligations as they fall due. Prudent directors seek advice from professionals, while some opt for the ‘cheaper’ solution to attempt to save their business. Although these cheaper alternatives are tempting, they often result in serious ramifications over time.
Illegal phoenix activity in Australia can be masked as a business rescue to the untrained eye. Often, there is a fine line between the two. So, what is the difference, and what are the warning signs?
Illegal Phoenix Activity vs Company Restructure
The Corporations Act 2001 (Cth) does not define the term ‘phoenix activity.’ However, the Australian Securities and Investments Commission (ASIC) describes illegal phoenix activity in Australia as the process by which a new company, for little or no value, continues the business of an existing company that has been liquidated or otherwise abandoned, to avoid payment of outstanding liabilities, taxation obligations, employee entitlements, and debts to creditors. When the liquidator is appointed, there are no assets to sell, thus creditors cannot be paid. This gives the new company an unfair advantage when competing for work because they carry less debt and have lower operating costs.
Some of the warning signs of illegal phoenix activity in Australia include (but are not limited to):
The old company replaces its name with its ACN number, and a new company is incorporated (with a different ACN), but the new company name is very similar to the old company name
Present or former directors transfer the old company’s assets to the new company at an undervalue
The same people in control of the old company remain in control of the new company
All or most of the liabilities are kept in the old company, with its creditors left deliberately unpaid
On the other hand, a legal restructure means the directors have not breached their directors’ duties and have acted in the best interest of the company, its employees, and creditors. For example, engaging an independent valuer to assess the true market value of the asset and selling it for that value. Doing so will not prejudice creditors because funds will be available to them.
Consequences
Apart from getting pursued by the appointed liquidator to reverse certain transactions, directors may also face significant penalties, including being subjected to hefty fines and up to 15 years imprisonment. Anyone who has aided and abetted in illegal phoenix activity in Australia, or in a creditor-defeating disposition, will also contravene the Act — for example, a pre-insolvency adviser, accountant, valuer, or financier. Penalties also apply to such contraventions, including cancellation of professional registrations or licences to operate.
Company restructuring is a complex process requiring a team of professionals. We recommend that you seek legal advice before considering your options. Our Insolvency & Commercial Litigation experts can help you navigate the intricacies of company restructuring with ease or offer strategic advice if you are facing illegal phoenix activity in Australia allegations or looking to legitimately restructure your business.
If you’re facing financial distress, or have concerns about illegal phoenix activity in Australia, contact Rostron Carlyle Lawyers for professional, strategic legal advice.
The blog published by Rostron Carlyle is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult Rostron Carlyle on any legal queries concerning a specific situation.
