Phoenixing activity involves creating a company to continue the business of a company that has been liquidated, in order to avoid paying liabilities, and to continue making profits. It has many detrimental impacts on the Australian economy, including employees missing out on entitlements, businesses being left unpaid, and governments being deprived of taxes needed to provide community services. In 2018, the cost of illegal phoenixing was estimated at $1.8-$3.2 billion. This included direct costs of $1,162-$3,171 million in unpaid debts to businesses, $31-$298 million in unpaid entitlements to employees, and about $1,660 million in unpaid taxes and compliance costs for the Federal Government.
The activity is named after the phoenix, an immortal bird from Greek mythology that cyclically regenerates from the ashes of its predecessor.
In 2020, the Corporations Act 2001 was amended to introduce phoenixing offences and grant stronger powers to federal authorities to tackle phoenixing activity.
Reforms to the Act to prevent phoenixing included expanding directors’ duties to include a duty to prevent creditor-defeating propositions. A disposition of the property of a company is a creditor-defeating disposition if it is made for less than its market value or less than the best reasonably obtainable price, and this prevents, hinders or delays the property from being available for the benefit of creditors in the winding-up of the company.
An offence is committed if a company officer engages in conduct that results in the company making a creditor-defeating proposition, or if a person incites, procures, induces or encourages a company to engage in a creditor-defeating proposition. To be held criminally liable, the officer must be reckless about the result of their conduct (they are aware of the risk and intentionally engage in the conduct). The maximum penalty for a person is 4500 penalty units ($999,000) or three times the benefit obtained (and detriment avoided), or imprisonment for 10 years, or both. The maximum penalty for a company is 45,000 penalty units ($9,990,000), or three times the benefit obtained (and detriment avoided), or 10 per cent of the annual turnover of the company.
The anti-phoenixing laws allow a court to void a creditor-defeating proposition and restore parties to their previous positions, and allow liquidators and creditors to recover compensation from officers and facilities who have made a creditor-defeating proposition. A liquidator can ask the Australian Securities and Investments Commission (ASIC) to make an order that:
- directs a person to transfer company property that was the subject of the disposition;
- requires a person to pay to a company an amount that in ASIC’s opinion fairly represents some or all of the benefits the person has received as a result of the disposition;
- requires a person to pay to a company an amount that in ASIC’s opinion fairly represents the application of proceeds of property that was the subject of the disposition.
Safe harbour provisions
The Act contains “safe harbour” provisions that protect a person from prosecution if they are undertaking a legitimate company restructure with an aim to bring about a better outcome for the company than the appointment of an administrator. Factors to be considered include whether he person is taking proper steps to:
- inform themselves of the company’s financial position;
- prevent misconduct by officers and employees that could adversely affect the company’s ability to pay its debts;
- ensure the company is keeping appropriate financial records;
- obtain proper expert advice;
- develop or implement a plan to restructure the company to improve its financial position.
The Act allows a court to order a company director to pay the company compensation equal to the amount of loss or damage caused when the director incurred a debt by allowing the company to trade while insolvent. It also allows a creditor, with written consent from the company’s liquidator, to sue for compensation over a debt owed to the creditor by the company.
Company directors can also be held personally liable by the Australian Taxation Office for the company’s GST and other tax liabilities, such as PAYG withholding amounts and superannuation.
Tips to avoid phoenixing companies
To protect against doing business with a company that may be engaged in phoenixing activity, businesses should be aware of signs such as:
- being offered quotes lower than market value;
- the company having directors who have been involved with liquidated companies;
- requests for payments to a new company;
- changes to a company’s name, while directors, staff and services remain the same.
Online checks can be made to ensure the company has a valid ABN and is a registered entity and not in liquidation or external administration. Other checks can include asking for referees, conducting a credit check and searching online for negative publicity.
Employees and contractors should recognise warning signs such as not receiving a payslip, being underpaid or paid late, not receiving entitlements, and being paid by an entity with a name that does not match the name of the company for whom they work.
For advice or representation in any legal matter, please contact Armstrong Legal.