The Federal Government recently released a consultation paper outlining proposed reforms to combat illegal phoenix activity.1 We welcome the release of the consultation paper as the issue of illegal phoenix activity, while discussed over the years, continues to be an ongoing issue. The consultation paper covers issues relating to corporate governance, insolvency and tax laws. This article focuses on insolvency law.
The proposed changes will, to a varying extent, affect insolvency practitioners, restructuring advisers, company directors and creditors. The consultation period closed at the end of October 2017. The Federal Government will now be assessing any feedback received.
What is illegal phoenix activity?
There is no legal or statutory definition of phoenix activity. That said, phoenix activity is a term that is often used in the context of a transfer of assets from one company to another to deliberately avoid paying creditors in circumstances where there is a link between the two companies. Commonly, the new company will have a similar name, management and ownership to the company that has been wound up.
There are two main types of illegal phoenix activity and these have become a focus for regulators.
- Pre-insolvency advisers may approach directors of a failing company and suggest phoenix activities as a way to save the business. For example, pre-insolvency advisers might suggest asset sales or restructures that will defeat creditors' interests. The company is left as an empty shell with no assets to ultimately be liquidated.
- In some more sophisticated cases, companies adopt phoenix activity as a business model from the outset. The directors of such companies never intend to pay trade creditors and other liabilities and, from the beginning, intend for the company's assets to eventually be transferred to another company. This gives an unfair commercial advantage to those that engage in such behaviour.