In the context of rising interest rates and difficult market circumstances, companies are increasingly considering the potential benefits that a restructure could bring for their businesses. However, if your company is experiencing cashflow issues it is important to be aware of the consequences that a hasty and under-planned restructure can have for directors if the company is found to have been insolvent. In particular, this article will address liability for illegal phoenix activity, including:

  1. What is illegal phoenix activity?
  2. What are the consequences of illegal phoenix activity?
  3. How can you reduce the risk of illegal phoenix activity?
What is illegal phoenix activity?

Illegal phoenix activity is the name given to the practice of transferring the assets of a company which is insolvent or on the brink of insolvency to a new company for little or no consideration- leaving the old company to face a liquidation with no assets to satisfy creditors. The term “illegal phoenix activity” itself does not exist at law and is an allusion to the mythical phoenix which regenerates from its own ashes.  

ASIC considers the following, among other things, to be warning signs of illegal phoenix activity:

  1. The directors of one failing company which cannot pay its debts transferring the property of the failing company to a new company for less than market value consideration;
  2. The new company operating the same or a similar business to the failing company, often with the same staff, premises, and assets; and
  3. The new company being controlled and operated by the same directors and shareholders as the failing company. 
What are the consequences of illegal phoenix activity?

Illegal phoenix activity may result in breaches to the following provisions of the Corporations Act 2001 (Cth):

  1. Sections 588GAB and 588GAC, which pertain to creditor-defeating dispositions;
  2. Section 588FA, which pertains to unfair preferences; and
  3. Sections 180 to 184, which pertain to duties of diligence, good faith, proper use of position, and proper use of information by directors. 

The consequences of these breaches may include:

  1. Reversal of certain transactions;
  2. Disqualification from serving as a director;
  3. Civil penalties; and
  4. Criminal penalties.
How can you reduce the risk of illegal phoenix activity?

While it is worthwhile to be aware of the factors which activity may constitute illegal phoenix activity, there are several steps that you can take to mitigate this risk including:

  1. Confirming the solvency of your companies before transferring valuable assets to another entity;
  2. Obtaining an independent valuation of any assets prior to transferring assets, especially in circumstances where you are concerned that a company may be in financial distress; and  
  3. Seeking legal advice before proceeding with any contemplated restructure. 

The beginning of a new year is the perfect time to reflect and consider whether your corporate structure is best serving your business and wealth planning needs. Get in touch today to organise an obligation-free consultation with our Commercial or Private Wealth team for 2023. Additionally, our litigation team are ready to help you respond to allegations of illegal phoenix activity if you require assistance. 

Disclaimer

The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.

Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.

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