With the cost of illegal phoenix activity in Australia estimated at between $1.8 and $3.2 billion*, the Federal Government is taking steps to stamp out illegal activity. This may have implications for advisors whose clients are attempting to restructure their businesses. We’ve prepared this insight to help you stay on the right side of the law.

Understanding legal vs illegal phoenix activity

Illegal phoenix activity is not specifically defined in the Corporations Act 2001 (the Act), but is illegal if it triggers a breach of director’s duties under the Act (for instance, s184: duty to act in the best interests of the company and for a proper purpose).

ASIC and other government bodies describe illegal phoenix activity as ‘involving the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements’.

However, phoenix activity is legal when the intention of the company’s directors is to undertake a legitimate business rescue and a fair price is paid by the new company for any assets transferred to it by the indebted company.

What action has the Federal Government taken?

The Federal Government established the Phoenix Taskforce to provide a whole-of-government approach to combatting illegal phoenix activity. It comprises more than 20 Federal, State and Territory government agencies, including the ATO, Australian Securities & Investments Commission (ASIC), Department of Employment, and the Fair Work Ombudsman.

The ATO and ASIC have taken lead roles in the taskforce, conducting access visits without notice to pre-insolvency advisors suspected of promoting and facilitating illegal phoenix activity.

Several pre-insolvency advisors have been found to have referred dormant (‘post phoenix’) companies to so-called ‘friendly’ liquidators who have become compromised by not raising issues or acting against directors in accordance with their obligations.

In further measures recently announced by the Federal Government:

  • company directors will be assigned a ‘Directors Identity Number’, which will enable tracking between the databases of relevant government agencies to better identify phoenix activity
  • suspected phoenix operators will be required to provide the ATO with a security deposit that can be used to recover unpaid taxation debts before establishing new companies
    the ATO will begin broader recovery powers following the issuance of a Director Penalty Notice, and will have the power to withhold refunds from companies whose directors have a record of phoenix activity
    phoenix operators will become personally liable for GST debts, and the ATO will be given additional resources and other powers to pursue directors.

Implications for your clients

How obtaining advice from unscrupulous pre-insolvency advisors can put you and your clients at risk.
A breach of director’s duties can result in:

  • a criminal offence with a penalty of up to $200,000 or imprisonment for up to five years, or both
  • a civil penalty provision (and the court may order you to pay to the Commonwealth up to $200,000)
  • personal liability to compensate the company or others for any loss or damage they suffer.

Where an illegal phoenix occurs, a liquidator may be able to claw back funds from a new company for the benefit of creditors of an indebted company. An insolvency practitioner will also report to ASIC any contraventions of the Act. ASIC has also funded liquidators to investigate and report into the failure of asset-less companies, ensuring even when a company that has been used for illegal phoenix activity is without funds, investigations and prosecutions can occur.

Where directors have been responsible for successive insolvencies, ASIC has banned them from operating a company, to protect the interests of creditors and stakeholders.

Advice from a reputable insolvency practitioner offers the best protection

If your client is contemplating a business restructure or if the business is experiencing financial distress, ensure you refer clients to a reputable advisor. If in doubt, speak to us.

Our practitioners are registered liquidators. Most are members of the Australian Restructuring, Insolvency & Turnaround Association (ARITA) and subscribe to ARITA’s Code of Professional Practice. Registered insolvency practitioners provide directors with the opportunity to pursue a restructure process that ensures you and your clients don’t breach director’s duties.

How can your clients protect themselves against loss from illegal phoenix activity by their customers?

ASIC also provides guidance for creditors to avoid phoenix companies by knowing who they’re going into business with, including:

  • confirming the business is registered and its ABN is valid
  • obtaining a credit check
  • asking for references
  • getting a company report from ASIC
  • searching the company and its directors online for any adverse media reports
  • asking for payment up front or in instalments
  • including a contract clause requiring the business to have all their taxes paid up-to-date. This creates a right in contract that you can pursue in the event of illegal phoenix activity.

Additional protections to discuss with your clients include:

  • ensuring security interests are appropriately registered on the Personal Properties and Securities Register
  • ensuring that debtor ledgers are well managed, including appropriate credit limits and timely collection activity
  • instructing your clients to take appropriate personal guarantees from their customers.

Where your clients can go for help

Australian Taxation Office

The ATO can provide advice on what to do if you have been a victim of a phoenix and can be contacted to report suspected phoenix companies.

Australian Securities and Investments Commission

ASIC can provide advice on your rights against a company that is placed into liquidation.

PPB Advisory

PPB Advisory can assist your clients through:

Insolvency Services

We provide both informal services including advice, pre-lending reviews, investigating accountants’ reports and informal workouts as well as formal appointments including:

  • Voluntary Administration
  • Deed of Company Arrangement
  • Receivership and other security enforcement
  • Court Liquidation
  • Creditors and Members Voluntary Liquidation
  • Personal Insolvency Agreement
  • Bankruptcy

Restructuring and Turnaround Services

We bring extensive experience to conduct strategic reviews and advise clients on enterprise enhancement and/or workouts.

Our solutions include:

  • strategic advice and planning
  • financial modelling
  • performance improvement
  • risk management
  • transaction advice
  • crisis stabilisation and viability reviews
  • financial and operational restructuring
  • refinancing
  • sale of assets and divestments

*A Productivity Commission report in 2015 found there were between 2,000 to 6,000 phoenix companies operating in Australia, costing A$1.8 billion to A$3.2 billion per annum.