What is illegal phoenix activity?
Illegal phoenix activity happens when a director transfers the assets of an existing company to a new company without paying the true market value of the assets and leaves the existing company with debts. The existing company is then placed into liquidation and the directors continue to trade the business as normal. To trade the company on as normal means that the director might to have pay certain trade creditors and suppliers to continue the business, so those essential to the business get paid whilst the rest lodge a claim with the Liquidator as their debt was not transferred to the new entity. Unfortunately, the existing company was left with no assets and accordingly, those creditors receive nothing. Most often this is the ATO.
The impact of the loss
Some of those creditors owed monies from the existing company may be able to absorb the loss, others might have to consider finance options whilst the balance will need to consider insolvency options of their own. The direct cost of illegal phoenix activity was estimated to cost between $2.85 billion to $5.13 billion for the period from 1 July 2015 to 30 June 2016. This amount is spread over the following parties:
- Private business including unpaid trade creditors from $1.16 billion to $3.17 billion;
- Employees for unpaid entitlements from ranging from $31 million to $298 million; and
- The Government for $1.66 billion million for unpaid taxes and compliance costs.
It is difficult to measure the actual true direct costs as many creditors did not lodge proofs of debts, some debts are not calculated and often businesses which engage in illegal phoenix activity maintain poor records.
What is the ASIC doing about illegal phoenix activity?
The Australian Securities and Investments Commission (ASIC) is taking various actions to discourage illegal phoenix activity and prosecute those involved with it. The ASIC’s website says that it is using the following tools available to it:
- Education and outreach – We engage with industry representatives to identify companies potentially at risk of engaging in phoenix activity to ensure they are aware of their legal obligations and raise awareness.
- Surveillance and compliance – We identify directors who have a history of failed companies and use data analytics to determine if they may engage in future illegal phoenix activity. We conduct surveillance and use compliance strategies to prevent further offences.
- Liquidator Assistance Program – If directors don’t give books and records to the liquidators or report a failed company’s affairs, ASIC assists the appointed liquidators to obtain them and prosecute the directors.
- Assetless Administration Fund (AA Fund) – ASIC can provide a monetary grant to liquidators to help them compile a report into the failure of a company. This is only available where there are not enough assets to fund the preparation of the report.
- Disqualifying directors – Directors are disqualified from managing corporations where they have been involved in two or more companies placed into liquidation in the past seven years.
- Enforcement action – ASIC takes action against those who facilitate, aid or abet illegal phoenix activity, including against directors who breach their duties.
The ATO is also, in conjunction with ASIC, taking various action including prosecutions of those involved in phoenix arrangements which adversely effect the ATO or employee super.
Contact us for assistance?
If your business is struggling to meet its debts, we encourage you to be proactive and seek advice on what steps you can LEGALLY take. So please get in contact with us on 1300 906 966 or send us an email to firstname.lastname@example.org to arrange a free initial consultation.