Small business-illegal phoenix activity
Illegal phoenix activity involves the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements.
The directors leave the debts with the old company, often placing that company into administration or liquidation, leaving no assets to pay creditors.
Meanwhile, a new company, often operated by the same directors and in the same industry as the old company, continues the business under a new structure. By engaging in this illegal practice, the directors avoid paying debts that are owed to creditors, employees and statutory bodies (e.g. the ATO).
Illegal phoenix activity is a serious crime and may result in company officers (directors and secretaries) being imprisoned.
Characteristics of illegal phoenix activity
Not all company failures will involve illegal phoenix activity. Genuine company failures do occur. Where a business has been responsibly managed, but fails, that business may continue after liquidation by using another corporate entity without, necessarily, being involved in illegal phoenix activity.
Illegal phoenix activity, on the other hand, typically involves those in control of companies, such as directors or former directors, deliberately avoiding liabilities by shutting down the original indebted company (e.g. by placing it into liquidation), transferring some or all of the assets to another company and then using that company to conduct the same type of business.
This practice severely disadvantages creditors and gives these business operators an unfair competitive business advantage.
While illegal phoenix activity can take many forms, the key characteristics are that:
the company fails and is unable to pay its debts
the company acts in a manner that intentionally denies unsecured creditors equal access to the company's assets to meet and pay debts
soon after the failure of the initial company (usually within 12 months), a new company commences which may use some or all of the assets of the former business and is controlled by parties related to either the management or directors of the previous company.
The impact of illegal phoenix activity
Figures in a report commissioned by Fair Work Australia put the cost of this activity to the Australian economy at potentially more than $3 billion annually.
The report, Phoenix activity: sizing the problem and matching solutions, estimates that the annual cost of illegal phoenix activity is:
up to $655 million for employees, in the form of unpaid wages and other entitlements
up to $1.93 billion for businesses, as a result of phoenix companies not paying debts, and for goods and services that have been paid for but not provided, and
up to $610 million for government revenue, mainly as a result of unpaid tax – but also due to payments made to employees under the General Employee Entitlements and Redundancy Scheme (GEERS) now the Fair Entitlement Guarantee (FEG).
Those affected by illegal phoenix activity include employees of the original failed company, other businesses that are owed money because they have supplied goods and services and statutory bodies like the Australian Taxation Office.
ASIC currently has a number of initiatives to combat illegal phoenix activity.
Funding liquidators: The Assetless Administration Fund was established by the Australian Government and is administered by ASIC. It is used to finance preliminary investigations by liquidators into the cause of the failure of companies with few or no assets. Liquidators prepare and lodge reports with us. We may then consider taking enforcement action.
Disqualifying directors: We can also disqualify directors from managing corporations where they have been involved in two or more companies that have been placed into liquidation within the past seven years. We rely on statutory reports provided by liquidators to support our decisions to disqualify directors from managing corporations. A significant number of statutory reports allege illegal phoenix activity. Directors can be disqualified for up to five years.
Liquidators Assistance Program: ASIC regularly helps liquidators to secure the books and information of companies in external administration by ensuring that directors comply with their legal obligations. Directors who fail to meet their obligations may face court action
Identifying and deterring illegal phoenix activity: In July 2013, ASIC launched a new surveillance initiative aimed at deterring illegal phoenix activity, with a focus on failed companies in the construction, labour hire, transport, security and cleaning industries where there have been allegations of illegal phoenix activity.
We are now paying special attention to individuals who are current directors of new companies, but were also directors at the time these companies failed or ceased being directors shortly before the companies were wound up.
ASIC is meeting with industry representatives to raise awareness about illegal phoenix activity and our other regulatory initiatives.
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