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.
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.