The Fight to Combat Illegal Phoenixing

April 19, 2023

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With the recent introduction of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Illegal Phoenixing legislation), the law has been heightened to restrict and punish those engaging in illegal phoenix activity. 


The long-awaited legislation will enable the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office (ATO) and insolvency practitioners to take increased action to combat this illegal activity, and will require directors to carefully consider their company obligations.
 
What is illegal phoenix activity?

Illegal phoenix activity involves the stripping and transferring of an entity’s assets to a new entity, thereby denying any creditors of the old entity access to those assets to meet unpaid debts. Essentially, this allows directors to continue operating the same business under a new entity without any, or with limited, liability. 

There are a number of people usually involved in phoenix activity, including:
  • pre-insolvency adviser – an adviser who encourages phoenix activity by maintaining a network of ‘friendly’ professionals who assist companies in financial trouble;
  • valuer – a valuer who provides low valuations of the company’s assets;
  • liquidator – a liquidator who doesn’t investigate the affairs of the company, attempt to recover illegally removed assets or report their findings to ASIC and creditors; 
  • dummy directors – fake directors appointed to the old company just prior to its failure or to the new company that aren’t involved in the running of either company; and
  • phoenix operators – the controlling minds behind the phoenix activity and the people that ultimately benefit from it. 
Illegal phoenix activity has a significant impact on sub-contractors, creditors and employees that are left unpaid, as well as the broader community because the entity avoids paying tax and other entitlements which the government often subsidises. The Economic Impact of Potential Illegal Phoenix Activity Report estimates that phoenix activity costs the Australian economy $2.85 to $5.13 billion dollars annually, with between $31 to $293 million dollars in unpaid employee entitlements.
 
Illegal Phoenixing legislation amendments

The amendments to the Corporations Act 2001 (Cth) and Taxation Administration Act 1953 (Cth) arising out of the Illegal Phoenixing legislation aim to target those involved in illegal phoenix activity to prevent it from occurring. 

Some key amendments are:
  • introduction of the creditor defeating disposition, a concept whereby the disposition of company property is a creditor defeating disposition if the consideration payable for the property was less than market value or the best price reasonably obtainable for the property and the disposition has the effect of preventing the property from becoming available, or readily available, for the benefit of creditors;
  • introduction of new phoenix offences and civil penalty provisions which carry the highest penalties available under the law to target those who conduct or facilitate phoenix activity (large fines and imprisonment up to 15 years);
  • provision of new recovery powers to ASIC and liquidators to improve their ability to recover assets lost through phoenix activity;
  • preventing directors from improperly backdating resignations or resigning where the company would be left with no directors to avoid liability or prosecution; 
  • extending director penalty provisions making directors personally liable; and
  • expanding the ATO’s power to retain refunds where there are outstanding tax lodgements. 
What this means for you

The Illegal Phoenixing legislation is a reminder of the importance to seek advice and assistance before entering into contracts for the provision of goods and services and transferring/selling a business to ensure you are protected from engaging in or being affected by illegal phoenix activity.

Danielle Williams (Solicitor)

If you would like further information in relation to how the above matters may affect you, please contact us on (08) 9321 5451 or by email danielle@bailiwicklegal.com.au. For further information about our legal services, please visit our website: https://www.bailiwicklegal.com.au/

The above information is a summary and overview of the matters discussed. This publication does not constitute legal advice and you should seek legal or other professional advice before acting or relying on any of the content.
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