Company phoenixing or ‘phoenixing’ occurs where, the primary controllers of a failed company conducts the same type of business while using some or all of the former company’s assets.
When is Company Phoenixing illegal?
Despite the adverse stigma that is most commonly associated with ‘Phoenixing’, there are circumstances in which it can be legal. There are many examples and success stories where a person has revived the business previously conducted after the financially distressed company enters liquidation and its remaining assets are distributed to creditors.
However, such activity is illegal when this attempted resurrection comes before creditors are paid and where the use of the former company’s assets was uncommercial.
For example, John realizes that ‘John’s Farms Pty Ltd’ cannot pay its debts as and when they fall due. John therefore decides to transfer the company’s assets to the newly-incorporated ‘Johnno’s Farming Pty Ltd’ for little to no value before putting John’s Farms Pty Ltd into liquidation. In this way, John has avoided paying the creditors of John’s Farms Pty Ltd, and has not legally “phoenixed” from the old entity to the new entity.
The Impact of Company Phoenixing
Company phoenixing affects many trades and industries, and sadly, appears to be on the rise.
In 2012, phoenix activity was estimated by Price Waterhouse Coopers and the Fair Work Ombudsman to have costed the Australian Economy between $1.8 to $3.2 billion annually. A second report in July 2018 indicated that this figure could now be as high as $5.13 billion per year.
Unpaid trade creditors seem to suffer the most, making up approximately 61.8% of this figure, whereas unpaid employee entitlements are approximately 5.8% and unpaid taxes and compliance costs are approximately 32.3%.
What is being done about company phoenixing it?
Early in 2019, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was introduced (but had not been passed into law prior to the Federal Election in May 2019). In summary, the Bill purports to:
amend the Corporations Act 2001 (Cth) by introducing new criminal offences and civil penalty provisions for officers who fail to prevent a company from making ‘creditor-defeating dispositions’;
Empower Liquidators in allowing them to apply for court orders in relation to voidable, creditor-defeating dispositions;
Enable ASIC to make orders for the recovery of company property disposed of under such a disposition; and
Improve the accountability of resigning directors so as to prevent companies being left rudderless.
Further, individuals who engage in “illegal phoenixing” can expect to receive a fine of up to $945,000.00 or imprisonment of 10 years for contravening these provisions whereas body corporates can expect to receive penalties of either $9.45 million or 10% of the entity’s annual turnover.
What you can do about phoenixing
Even if these measures are implemented, it is important for you to proactively assess a company’s circumstance.
As an employee, it is important to look for warning signs such as late payment or non-payment of wages, unpaid superannuation and entitlements.
As a creditor, one should be aware of late payment or non-payment of invoices which may indicate financial distress, as well as changes to company details.
Noting that officers of the company have certain duties under the Corporations Act 2001 (Cth), it is important to monitor the financial health of the corporation and ensure that decisions are made in accordance with key duties.
Often, the best way to ensure that your rights and obligations are being met is to seek advice.
How can we help?
Rostron Carlyle Rojas Lawyers are well appraised in the field of corporate law and are able to assist companies, company officers, creditors and employees in ensuring the discharge of their duties and protection of their rights. If you or someone you know requires further assistance, please do not hesitate to contact our Corporate Lawyers on (07) 3009 8444 or email us at [email protected].
Please note that this article has been prepared by Kishen Bhoola, Lawyer and settled by Sarina Mari Alwi, Senior Associate of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.