Illegal phoenix activity occurs when directors of a company leave the company or transfer the business of an existing company to a new company without paying the true value of the business. Once the assets are transferred to the new company, the old company is usually placed in liquidation. Therefore, given the company is no longer in possession of assets, creditors of the company cannot be paid, while the directors of the old company continue operating their business in the new company, taking advantage of less debt and lower operating costs.
Legal phoenix companies
Sometimes companies need to restructure due to genuine failures. When a director acted with honesty and in the best interest of the company, but the company has failed, the company can operate the business through another company, and it is often called ‘company restructure’. In this case, if the old company is liquidated, the creditors still can proceed to sell the company’s assets.
In fact, the main difference between an illegal phoenix activity and a legal phoenix company is laid in the intention of the directors. Where in illegal phoenix activities context, a director intentionally gets involved in dishonest or reckless activities to avoid debts.
Impacts of illegal phoenix activity
The major impacts resulted from illegal phoenix activity are:
- Employees are left unpaid and missed out on superannuation
- Suppliers and sub-contractors are left unpaid
- Community is affected because of unpaid taxes
How to identify and avoid illegal phoenix activity
Companies involved in illegal phoenix activities are usually common in showing these signs:
- The company cannot pay its debts
- A new company with a similar name to the old company is registered
- The assets of the old company are transferred to the new company for less than market value
- Same or similar business as the old company is operated by the new company
- The same website, bank account and other resources are used by the new company
- The managing team of the new company is often same as the old company.
To avoid illegal phoenix activity, consider these tips:
- Avoid untrustworthy advisors who offer assisting with phoenix activities
- Investigate quotes that are lower than market
- Conduct due diligence on directors with a record of liquidation
- Pay attention to change of directors and company’s name, while staff are the same
Breach of directors’ fiduciary duties and committing fraud are serious consequences of illegal phoenix activities specified under Corporations Act 2001. Hefty fines and up to 15 years imprisonment may be imposed.
Recent amendments in the legislation have equipped ASIC with more power to deal with illegal phoenix activities. Now ASIC is able to enforce return of a property or monetary equivalent from the person who obtained the property as a result of illegal phoenix activity. Further, the new amendments do not allow backdating the resignation of directors beyond 28 days and directors will be personally held accountable for any owed GST.