Illegal phoenixing is a fraudulent business practice in which an individual or company intentionally liquidates or winds up operations to avoid paying its debts and then re-emerges under a new name and continues operating as if nothing had changed.
Illegal phoenixing intends to deceive creditors, vendors, suppliers, and partners. Those involved in the initial company will be listed as owners or have some control over the new business without anyone knowing they are the same people. This allows them to claim additional assets when filing for bankruptcy while operating in secret. It can also allow them to get loans from banks at more favourable terms by claiming they have different assets than they do.
Individuals or companies that are doing illegal phoenix activity will likely file for bankruptcy within a few years because this process is not sustainable. However, it can be very costly for those who extend credit to the businesses involved.
Warning Signs of Illegal Phoenix Activity
There are a few warning signs that can help you spot illegal phoenixing activity:
- The company fails and is unable to pay its debts.
- The company’s name is changed to its Australian Company Number (ACN), and a new company is registered, often with a name similar to the old one.
- The assets of the old company are transferred to the new company for less than market value by the directors or former directors.
- The new company does the same business or similar work as the old one, sometimes in the same place and with some of the same employees and assets.
- The new company often uses the old company’s bank account, advertising materials, websites, or contact information.
- The people in charge of the old company have control over the new one.
Illegal phoenix activity is a serious matter with severe consequences, so it is important to seek legal assistance as soon as possible.
Who is involved in illegal phoenixing?
Illegal phoenix activity is usually carried out by a small group of people, including:
Dummy directors or former company directors: These people are often family members or friends of the real directors. They may be paid to act as directors, or they may not know that they are being used to illegally phoenix a company.
Real company directors: These people are usually the ones who benefit most from illegal phoenix activity. They may use it to avoid paying debts, taxes, employee entitlements, or other liabilities.
Liquidator: The liquidator may be involved in illegal phoenix activity if they do not properly investigate the directors of the company or if they allow the directors to illegally transfer assets to a new company.
Valuer: A valuer may be involved in illegal phoenixing if they give a false or misleading valuation of the company’s assets.
Pre-insolvency adviser: A pre-insolvency adviser may be involved in illegal phoenixing if they advise the directors of a company to illegally transfer assets to a new company.
Phoenix operators: These are people who specialise in setting up and running companies that have been illegally phoenixed. They may be paid by the directors of the company to do this.
Difference Between Illegal Phoenix Activity and Legal Phoenix Activity
It is important to note that not all phoenix activity is illegal. In some cases, a company may legitimately go out of business and be replaced by a new one. This is known as a “legal phoenix.”
A legal phoenix happens when the original company was solvent (able to pay its debts) but failed due to poor management, competition, or other reasons. The owners may then choose to start a new company and use their knowledge and experience to try to avoid the mistakes that led to the failure of the first business.
A legal phoenix can also happen when a company is bought by another business and then reborn under the new owner’s name. This usually happens when the original company was struggling financially and the new owner wants to distance themselves from the old company’s debts.
Illegal phoenixing is a serious problem, but it’s important to know the difference between legal and illegal phoenixing so you can take the appropriate action if you suspect someone is engaged in this fraudulent activity.
The key difference between illegal phoenix activity and legal phoenix activity is the company directors’ intention or recklessness. Where there is an intention to avoid paying debts, or where the company was not solvent at the time it ceased trading, this would be illegal phoenixing.
The Act
The Act changes the Corporations Act 2001 (Cth) (Corporations Act). It also makes some small changes to the A New Tax System (Goods and Services Tax) Act 1999 (Cth) and the Taxation Administration Act 1953 (Cth). Collectively, the following are the most important parts of the changes:
- New criminal offences and civil penalties for company officers who fail to prevent the company from making creditor-defying dispositions. A creditor defeating disposition occurs when a company’s assets are sold to a new company for less than their market value or the best price that could have been obtained for the assets. When a company is wound up, this disposition prevents creditors from seizing assets to pay off debts.
- The new legislation gives ASIC more authority to order the return of property or an equivalent monetary value from the person who received the property as part of illegal phoenix activity.
- Directors’ resignations will be backdated to a maximum of 28 days, and Directors will now be personally liable for any GST owed to the Australian Taxation Office by the company.
Conclusion
Illegal phoenixing is a serious problem in Australia. It can leave employees without entitlements, creditors out of pocket, and the tax office owed money. The new laws are designed to crack down on this fraudulent activity by making it a criminal offence and increasing the penalties for those who engage in illegal phoenixing. If you suspect that someone is an illegal phoenix company, you should report it to the Australian Taxation Office (ATO) or ASIC.
Talk to our experts now
We, at Small Business Restructuring Specialists, have the knowledge and experience to help you if you feel you may be in this situation or are being advised that this is your only way forward. We can advise you on safer options that would not lead to any liability against you. Contact us today for a free initial consultation.
