‘Phoenix activity’ is a broad term commonly recognised in the solvency world for its ability to help company controllers avoid the stress and pain of standing over a failed business. Phoenix activity, however, runs the full gauntlet of positive and negative implications, as it applies to illegal activity, a legal phoenix restructure and even the shady parts in between.
What is phoenix activity?
The term draws inspiration from the mythical fiery bird that bursts into flames after death, only to be reborn from its own ashes. Phoenix activity broadly works in the same way – a second company rises from the proverbial ashes of its failed predecessor, but its business is essentially the same and is controlled by the same owners and directors.
Imagine a company in financial difficulty. The company directors, however, are not ready to walk away. Typically when a company is insolvent, it is placed into liquidation or voluntary administration, or is simply left dormant (and may then be deregistered). Before this happens, phoenix activity takes place when the company’s assets are transferred either to a newly formed company or an existing entity, such as a related company in a corporate group. The company is then able to continue its existence having altered from its original state.
Legal phoenix activity – the legal phoenix restructure
Legal phoenix activity is also known as ‘business rescue’ or a ‘legal phoenix restructure’. The legal phoenix restructure works when a company enters into an agreement to sell or transfer its business and or assets. The phoenix company, or old company, can do this with an existing company of a similar operation or with a newly incorporated entity. With the business and assets moved away from the old company and into a fresh vessel, company controllers like owners and directors can carry on their business operation without any significant looming debts or interruption.
The legal phoenix restructure remains legitimate as long as the company controllers have not breached any directors’ or officers’ duties as per the Corporations Act 2001 (Cth). It also counts as a legal business rescue if, in the act of winding up the old company, external administrators (like liquidators or administrators) have successfully carried out their duties in accordance with the Corporations Act 2001 (Cth) and their professional obligations.
Many company controllers turn to a legal phoenix restructure because they believe their business would be better off than if they were to resort to company liquidation. Legal phoenix activity is often preferred for a number of reasons including:
- Company controllers may have a strong personal desire to see their business succeed or may have incentives to try again;
- The phoenix company may have strong prior client connections or business relationships that can help its new existence; or
- Company controllers may be seasoned professionals with knowledge of the products, equipment and markets needed to succeed under a new company.
Why turn to legal phoenix activity?
Those who turn to phoenix activity to resurrect their business without the intentionally defrauding creditors may do so for a number of reasons.
For example, a company owner might wish to re-enter the market because their company failed due to factors outside their control, like an industry strike.
Here are some other reasons why company controllers may turn to legal phoenix activity:
- Company controllers learn from their mistakes and are willing to apply the lessons they learned to ensure their second wind at business is successful.
- A company that was financially viable is liquidated too early because nervous company controllers were too cautious of insolvent trading.
- Poor company controllers are bought out of their positions by new managers who have the skills, resources, ideas and experience to ensure a phoenix business run successfully
Illegal phoenix activity
Pulling a new company from the ashes of a failed predecessor may sound like a noble attempt at keeping the entrepreneurial spirit alive, but phoenix activity often has serious legal ramifications if it is not done correctly.
Phoenix activity becomes an illegal practice with the intention of avoiding debts and paying creditors. Company controllers may transfer their old company’s assets into a new entity, without paying true or market value. Once the old company’s assets are transferred, the company is then placed into liquidation and a new company takes its place under a new name and potentially in a new location. The new company, under the direction of the same company controllers, is free to operate without any of the significant debts that the old company should have paid to creditors.
Consequences of illegal phoenix activity
According to the Australian Securities and Investment Commission (ASIC), illegal phoenix activity can result in criminal penalties including large fines and up to 15 years imprisonment. Anyone involved in illegal phoenix activity, including pre-insolvency advisors, valuers and liquidator – not just company controllers – can be implicated and punished. Punishment is often on the grounds of breaches of director’s duties, fraudulent concealment or removal of assets and fraud by company officers under the Corporations Act 2001 (Cth).
'Problematic' phoenix activity
Those who attempt a legal phoenix restructure may not be immune from the legal ramifications and not those who are found guilty of illegal phoenix activity may have been acting with malicious intent. Sometimes a company controller may move to ‘phoenix’ their insolvent company with no intention of cheating their debt, but doing so has no benefit to their creditors.
Sometimes, a resilient (or perhaps stubborn) company controller with poor business skills is determined to succeed and refuses to learn their lesson, despite leaving a trail of failed companies and phoenix activity behind them. While they might not have the malicious intention of defrauding their creditors, their continued activity can have greater impact on a larger group of creditors as time goes on.
A legal phoenix restructure is a ‘business rescue’ when a company enters into an agreement to sell or transfer its business and or assets into a different or newly incorporated entity. The process is legal as long as company controllers have not breached any directors’ or officers’ duties as per the Corporations Act 2001 (Cth).
Illegal phoenix activity occurs when a failed company deliberately transfers its assets and business into a new entity before liquidation, in order to continue operating without having to pay outstanding debts, including taxes, creditors and employee entitlements.
Phoenix activity becomes problematic when it is performed with pure intentions but still negatively affects creditors. Problematic phoenix activity often occurs when a company director with poor business skills continuously revives their company because they are determined to make it work, but instead creates a growing list of unpaid creditors.
When this occurs, phoenix activity is no longer legal. Instead it is known as the ‘problematic phoenix’. This situation may not be blatantly illegal, but it does require governing entities like ASIC to intervene to stop an offending company controller from creating yet another phoenix company.
According to section s 206F of the Corporation Act 2001 (Cth), ASIC has the power to disqualify a person from managing a corporation for up to five years if, within the past seven years, the person has been an officer of two or more companies that were wound up and the liquidator lodged a report under s 533(1) about the company’s inability to pay its debts. ASIC must be satisfied that the disqualification is justified but in so doing can prevent additional phoenix activity that could cause increasing harm to creditors and the economy.
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