28 May 2018
The term ‘Phoenix Company’ is used when a company has deliberately shut down due to indebtedness, and the directors of that company start up a new company to re-commence trading in attempt to avoid the former company’s debt. It’s important to understand that there is legal and illegal phoenix activity.
Illegal phoenixing means that the directors involved will transfer the assets of the former company to a new company for little or no consideration and commence trading under the same trading terms it may have with its suppliers and/or customers. However, for suppliers and/or creditors, this can be a problem where there is a default and the former contracts with the former entity will not be enforceable against the new company, even though the new company is the one that holds the assets (and the money).
Identifying an Illegal Phoenix Company
While it may be difficult for creditors to identify whether a company may be an illegal phoenix company, there are a few key factors that can assist in identifying whether a business is engaging in illegal Phoenix behaviour or is otherwise a legitimate entity. Key factors of identification include:
As it can be difficult to ascertain whether you are dealing with an illegal phoenix company, we suggest the following due diligence checks are undertaken regularly in your business practices to avoid the predicament of being a creditor unable to enforce:
What are the consequences for directors of an Illegal Phoenix Company?
Under the Corporations Act (Cth) 2001 (“the Act”), directors have multiple duties which they must comply with, otherwise they may not only be in breach of the Act, but also place themselves in a position of personally or criminal liability for an act committed in the name of the company. Illegal Phoenix activity is one of those acts for which a director can incur serious penalties. ASIC outlines the following penalties which a director can incur if they are found to engage in illegal Phoenix activity:
What to do if you suspect you are dealing with an Illegal Phoenix company?
ASIC and the Australian Taxation Office are the Australian authorities that most closely monitor illegal phoenix activity and deal with complaints, allegations and reports of illegal phoenix activity, though there are various other government entities which also assist. If you are a creditor of a company and suspect a company you are dealing with is involved in illegal phoenix activity, the first step you can do is report the company to ASIC. JHK Legal can assist with compiling a complaint and report on your behalf.
Separately, if you are aware that a company you have dealt with has gone into liquidation and are aware that the same directors have established a new trading entity with the same assets but without good value having been paid to the former company for those assets, then you can simply report the conduct to the former company’s liquidator. The liquidator will be obligated to conduct investigations and compile a statutory report to ASIC. ASIC will then take steps to investigate the complaint and take the relevant enforcement action, which may result in the consequences outlined above.
JHK Legal has extensive knowledge on insolvency and debt recovery processes. We not only assist those who may be creditors or victims of illegal phoenix activity, but if you, as a director, are aware of your company having financial difficulties and are unsure of your director’s duties and responsibilities in relation to your company’s debts, we can assist with providing corporate advice as to options for your business’s structure, including financial options that will avoid any possibilities of breaching your director’s duties.
Hayley Tibbie – Lawyer