When a company has failed or becomes insolvent, it is perfectly legitimate to register a company to take over what is left of that company after liquidation. The directors of the failed company may have done everything they could to keep the company buoyant, but the company could not meet its debts. The insolvent company is then put into the hands of a liquidator, who sells the assets to pay the creditors and employees. The directors are then entitled to set up another company, similar to the one that failed, with renewed hope that this time it will succeed. This is kosher.

ASIC sniffing out phoenix directors who rip off creditors

What is not kosher is when the directors deliberately set up a phoenix company to avoid paying debts to creditors and gives these business operators an unfair competitive business advantage. This is done by transferring the assets of the old company to a new company, with the same or a similar name – for little or no cost, before the old company can be handed to a liquidator to realise the assets – leaving nothing for the anxious creditors including the ATO and employees.

This really sets the cat among the birds in the eyes of the regulators, specifically the Australian Securities and Investments Commission (ASIC), who are out to prosecute and punish directors who breach their duties to the company. Penalties can include a gaol term and hefty fines, and can extend to key players including advisers, valuers, liquidators, dummy directors and phoenix operators.

Government proposals aim to save companies from the ashes

As part of a broader policy initiative to “prevent, deter and disrupt” phoenix activity, the Minister for Financial Services, the Hon Kelly O’Dwyer MP has also proposed that directors be assigned a Director Identification Number (DIN) to assist ASIC, the Australian Taxation Office (ATO) and other regulators to trace the directors’ corporate paths and relationships.

Among a raft of proposals being considered, the government plans to:

For directors and employees of companies who are the subject of fraudulent phoenix activity, professional guidance is needed to ensure a path towards the best outcome. We can help provide expert advice in this very testing area.