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Phoenix activity relates to a transaction where a company director sells or transfers the assets (i.e. plant & equipment, stock, customer list, etc.) and business of an insolvent company to a new company in which they are also company director or otherwise associated with.

It is very important to understand that phoenix activity is illegal, and restrictions are placed on directors under Australian law to deter this from occurring.

Phoenix activities are also a breach of a director’s duties, and therefore directors also need to be aware that civil and criminal penalties and director banning exists for illegal phoenix activities if identified by a Liquidator.

Under Australian law (in particular the Corporations Act 2001 (the Act)) a Liquidator is afforded the power to deal with certain claims (i.e. Insolvent Trading) and the recoverability of assets based on a director’s misconduct (or you could say illegal phoenix activity).

In a scenario where a director enters into an agreement for a sale or transfer of a company’s business and assets that occur at an undervalue or for no consideration to a new company in which they are also company director or otherwise associated with, the following provisions of the Act may be enlivened and may be available to a Liquidator:

  • Sections 180, 181 & Section 182 – Directors statutory fiduciary duty not to misuse position and company property for own benefit.
  • Section 588FB(1) – Uncommercial transaction.
  • Section 588FDA(1) – Unreasonable director-related transaction.

Should a Liquidator’s investigation into a company’s business, property, affairs and financial circumstances identify a sale/transfer of a company’s business and assets that have occurred at an undervalue or for no consideration, a Liquidator can initiate recovery in the amount of the transaction or have the transaction overturned.

Despite these provisions of law being valuable tools, they are not preventative and in most cases the damage has been done and it may be too late for the Liquidator’s powers to come into effect for alleged phoenix activity for recovery. 

To get a better understanding of the impact of illegal phoenix activity on the Australian economy, the Phoenix Taskforce (comprising of the Australian Taxation Office (ATO), Australian Securities & Investments Commission (ASIC) and the Fair Work Ombudsman),

commissioned an accounting firm in Australia to measure the current impact of illegal phoenix activity.  The report quantified an annual direct impact of illegal phoenix activity to between $2.85 to $5.13 billion based on available data from the ATO relating to Businesses - unpaid trade creditors, Employees - unpaid entitlements and the Government – unpaid taxes and compliance costs.

The report also identified that phoenix activity has progressed over time. Click here to read the report.

Gaining an understanding of the legal repercussions of being involved in this type of transaction and stying free from the penalties of getting it wrong is recommend by What Is Liquidation?

An Illegal phoenix sale or transfer activity is a serious offence. To ensure market value for the company’s business and assets is obtained or to better understand the Liquidators powers surrounding phoenix activity contact a registered Liquidator at What Is Liquidation? today.