The Australian Securities & Investments Commission (ASIC), Australian Taxation Office (ATO) and other government organisations are currently taking steps to combat illegal phoenix activity which is believed to cost the Australian economy $3 billion annually. The ASIC has advised “illegal phoenix activity is a serious crime and may result in company officers (directors and secretaries) being imprisoned.
What is illegal phoenix activity?
There is no phoenix activity definition, and it does not refer to any specific sections, in the Corporations Act which applies to companies. To assist company directors, creditors and other stakeholders understand it, the ASIC has provided the following guidance on illegal phoenix activity as:-
- Illegal phoenix activity involves the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements.
- The directors leave the debts with the old company, often placing that company into administration or liquidation, leaving no assets to pay creditors.
- Meanwhile, a new company, often operated by the same directors and in the same industry as the old company, continues the business under a new structure. By engaging in this illegal practice, the directors avoid paying debts that are owed to creditors, employees and statutory bodies (e.g. the ATO).
- In circumstances where the ASIC identifies illegal phoenix activity it may commence enforcement action against company officers, including prosecuting officers for breaches of their duties under the Corporations Act or disqualifying directors from managing corporations for a period of time.
Engaging in illegal phoenix activity is not a particular offence, rather it is a collection of potential breaches under the Corporations Act and case law principles which may lead to civil and criminal prosecution by ASIC, or claims by a liquidator if appointed to the old company following the transfer of the company’s business and/or assets:
- Breaches of directors’ duties – potential civil and criminal penalties as well as claims against the directors by the liquidator
- Uncommercial transaction claims against the purchaser who received a benefit
- Preference claims against creditors who received assets or property in reduction of their debts
- Insolvent trading claim for debts incurred by an old company trading while insolvent
The increase in illegal phoenix activity coincides with the rise of pre-insolvency advisers in Australia following the global financial crisis in 2008. Someone who may appear to be a reputable business adviser, can in fact be providing questionable and advice which is potentially illegal. If you’re uncertain, you should satisfy yourself that you’re receiving proper advice by finding out:
- if they’re a qualified accountant, liquidator or bankruptcy trustee, lawyer or other professional
- whether they hold professional registrations with ASIC, CAANZ, CPA or ARITA
- if they have professional indemnity insurance
- where they learned about insolvency. Some advisers’ knowledge is limited to their own experience of being previously bankrupt or being a director of liquidated company themselves
- how much they charge, the basis of them charging you, what you will receive for that fee and whether it will cover associated legal and/or liquidation costs
Is a sale of business to a related party always illegal?
No. Company directors should note that not all transfers of assets between companies will be classified as illegal phoenix activity if a transfer is done appropriately. This includes sale being for fair value, pursuant to a sale and purchase agreement and the purchase price being paid on reasonable terms. A transfer of assets may not result in a director breaching his or her duties and the transaction may not be voidable in the result of liquidation. However, company directors should obtain appropriate advice from a qualified professional prior to entering into any such transaction.
If you would like to further explore this, you may be interested in our other articles on small business restructuring or the sale of a business or assets to a related party.
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