Author
Mitch BallChief of Insolvency Operations & ASIC Registered Liquidator
(02) 9220 7117
A ‘phoenix company’ is the name given to a new business entity that continues the operations of an existing company after it has gone into liquidation. When done legally, this can be a legitimate way to restructure and save a struggling business. However, illegal phoenix activity occurs when directors transfer assets to a new company for little or no cost to avoid paying debts, taxes, or employee entitlements.
This practice creates an unfair advantage and can leave creditors, employees, and the Australian Taxation Office (ATO) at a loss. If you suspect a phoenix company in Australia is engaging in illegal activity, it's crucial to report it to ASIC.
What does the term ‘phoenix company’ mean?
The term ‘phoenix company’ continues to attract controversy as it is not clearly defined in any piece of Australian legislation. Despite being mentioned in the Corporations Act (Cth) there is no definition attached to it.
Because illegal phoenix activity is difficult and expensive to prove, authorities such as ASIC and the ATO rely on financial records, director behaviour, and asset transfers to identify misconduct.
What is legal phoenix activity?
Most of the phoenix activity being carried out is illegal in nature but there are also instances where phoenixing is done with the right intentions.
Examples of legal phoenix activity include:
- A company facing financial distress sells its assets to a new entity at fair market value.
- Business restructuring that consolidates debt while keeping creditors informed.
- A company legitimately winding down operations and transitioning to a new entity with full transparency.
Legal phoenixing and business restructure
In some cases, businesses undergo restructuring or phoenix administration services to remain operational while fulfilling their obligations to creditors.
The process of restructure and turnaround is closely linked with legal phoenix activity. This is where a company in some form of distress implements a strategy with the intention of a prosperous outcome. Reasons for a business restructure include declining profit margins, poor efficiency, stagnating growth, lack of competitiveness and a shifting customer base.
Similarly, if the new company purchases assets of the existing company for a fair and equitable price, this is also an example of legal phoenix activity.
In many instances, debt consolidation along with financial and operational restructuring is part of the process. The key difference is that full disclosure is present with relevant parties such as creditors informed of the strategy being implemented and how any outstanding debts owed will be impacted.
Can you sue a phoenix company?
If you suspect that a company is engaging in phoenix activity, the first course of action is to report the company to ASIC. If you have previously done business with a company that has since been liquidated and rebranded under a different name using the same assets, you can contact the appointed liquidator to investigate.
Reporting a phoenix company
ASIC outlines a set of key Director responsibilities and duties that must be adhered to. This includes their entire tenure as the Director of a company with specific penalties set out in the Corporations Act (Cth) if they have failed to carry out their fiduciary duties.
This means Directors can be held personally liable for company debts, including phoenix activity. Not only may they face civil and criminal prosecution, but a Director may also be held personally liable to compensate individuals and other companies for losses. The process of carrying out legal action against any Directors is done by the regulatory body, namely ASIC.
How to identify phoenix activity
Recognising the warning signs of phoenix companies can help businesses and creditors avoid financial losses.
Common indicators of illegal phoenix activity include:
- A company has significant debts and in a position of financial distress
- The trading name of a business has changed but its operations, Directors and employees are retained
- A company that appeared to have ceased its operations re-opens within a short period with a different name at the same location or a similar trading name at an alternate site.
As a creditor, you should review your contracts regularly and ensure that the companies you are doing business with remain registered with ASIC. Personal guarantees signed by Directors provide additional security and the first sign can be as simple as payments coming from a different company.
What is a phoenix scheme?
A phoenix scheme is the process undertaken by Directors to create a phoenix company. When a failing company that is on the verge of insolvency or trading while insolvent is placed into liquidation, directors may:
- Transfer assets to a newly created company at little or no cost.
- Liquidate the original company, leaving creditors unpaid.
- Continue operating under the new company with reduced liabilities.
This gives the new company an unfair competitive advantage, as it inherits valuable assets without the financial burden of repaying debts, taxes, or employee entitlements.
Are phoenix companies legal?
Phoenix companies in Australia are legal if the transition from the old entity to the new one follows proper procedure and there is no misleading activity taking place.
Key legal requirements include:
- Assets must be sold at fair market value.
- Directors must not act dishonestly or recklessly.
- Creditors and employees must be fully informed.
Illegal phoenix companies are created when there is the presence of dishonest and reckless actions from Directors. If your company is experiencing financial challenges it is useful to obtain professional advice. Mackay Goodwin’s expert services can help you assess your options, restructure your company legally, and avoid the risks associated with phoenix activity.
References:
https://www.legislation.gov.au/C2004A00818/2021-07-01/text
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