War on phoenix activity continues

The federal government has recently established a “Phoenix Hotline” to allow members of the community (particularly creditors, employees and competitors) to report phoenix activity to the ATO, which may trigger an investigation into dishonest directors and companies. The hotline is the latest tool introduced by the Phoenix Taskforce, which was established in 2015 and comprises 32 Federal, State and Territory government agencies. The hotline also supports the government’s recent proposed amendments under Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2018 (the Bill) which, inter alia, seeks to create new phoenix offences that incorporate criminal and civil penalties and provides ASIC with powers to recover property disposed of in voidable transactions.

 

What is phoenix activity?

‘Phoenix activity’ or ‘phoenixing’ is a colloquial term used to refer to the creation of a new company to carry on the business and take over a previously failed or insolvent company, which is deliberately liquidated to avoid paying debts. The legality of creating the new company is determined by reference to the circumstances surrounding this action, including the reason for undertaking such action. If the new company is established to deliberately avoid paying the previous company’s debts, including taxes, creditors and employee entitlements, the creation of the new company is illegal.

Factors that help determine whether illegal phoenixing has occurred is where the new company is substantially identical to the previous company; for instance, the new company may trade from the same premises and has the same directors and shareholders as the previous company. A review of the accounts of the previous company will often show that its assets were either given away or transferred for a price significantly lower than market value to the new company or a related party immediately prior to the liquidation of the company.

Phoenix activity should be distinguished from a genuine restructure of a business experiencing financial difficulties, particularly where assets are sold at fair market value.

The phoenix hotline

The phoenix hotline allows informants to notify the ATO directly (via telephone, email or an online portal) of information or concerns of suspected phoenix behaviour, as well as an ability to upload documents and provide supporting evidence. This additional source of information is likely to enable timely action to be taken against dishonest companies and directors, which will help protect employee entitlements such as wages and superannuation and encourage payment of taxes and creditors.

In order to ensure the protection of whistle-blowers, informants can choose to provide information on a confidential basis.

Overall the establishment of the hotline has been praised, however there are concerns of potential abuse, targeting of innocent businesses and the burden it can place on small businesses. Whilst it is too early to evaluate the effectiveness of the hotline, it will be interesting to see how regulators use and react to information provided by informants.

If you are a creditor and suspect that a business may be engaging in phoenix activity in order to avoid paying you, or if your business is experiencing financial difficulties, please obtain legal advice in relation to your exposure and possible remedies.

This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.

Contributors

Danyal Ibrahim Associate
Belle McKinley Law Graduate