Illegal phoenix activity in business is more common than it should be, and a concept which the government and regulatory bodies like ASIC have been trying to combat for several decades. A new Bill seeking to crack down in this area has been introduced into Parliament. To discuss more on this topic, John Lobban, Special Counsel for Disputes and Restructuring Law in our Litigation and Insolvency at Murdoch Lawyers.
Dan: A new bill seeking to crack down on this area has been introduced into parliament. To discuss more on this topic, I’m speaking with John Lobban, special counsel at Murdochs in the litigation and insolvency team.
Dan: John, in the context of the corporate world, what is a Phoenix?
John: As followers of Harry Potter will know, a phoenix is a legendary bird that’s reborn from the ashes of its former self and in the corporate context, a Phoenix is called, a Phoenix is the name given to a business that’s restarted from the ashes of a failed or a liquidated company.
Dan: So why do businesses engage in illegal Phoenix activity?
John: Well if a business is allowed to fail or indeed if it’s made to fail, it doesn’t pay all of its debts. It doesn’t pay outstanding wages, superannuation, taxes and so forth. In the construction space, it means suppliers and subcontractors aren’t paid.
John: Now that money that should have gone to those people remains in the pockets one way or another of the business operator, and that doesn’t only hurt unpaid creditors, but also competing businesses that do the right thing and they’re at a disadvantage.
John: You’ll often find, Dan, that somebody that engages in this activity can undercut their competitors because they don’t have the same overheads.
John: It doesn’t mean that a business can’t emerge from insolvency. It can be legally restructured, but the illegal activity is the stripping of the assets of the failed company without paying a full or proper value for them.
Dan: John, what is the legislation in respect to Phoenix activity been like in the past?
John: Certainly, the laws have existed that prohibits that sort of activity, but to enable a liquidator of a failed company to attack the transactions, the liquidator looks at what’s left in the shell and usually there’s nothing. There’s no assets, sometimes there’s not even books and records.
John: So the liquidator asks the creditors to fund an action. They’ve already been stung once and now they’ve got to come up with money to take legal action going forward. It’s a complex procedure. You need to go to court and sometimes by the time you get a court order, the Phoenix has flown off somewhere else.
Dan: So we know that there’s a new bill that’s been introduced into parliament relating to illegal Phoenix activity. What kind of changes will this new bill bring to the table in your view?
John: It’s designed to help creditors who find that they’re involved with somebody engaging in this activity and it introduces a new concept called a creditor defeating disposition.
John: Now that means that anyone responsible for that disposition, not just the company directors or shareholders, but anyone involved in it can be subject to criminal charges, fines, compensation, etc.
John: Dan, that can happen in four ways. Firstly, a liquidator can use the laws to pursue the person who was involved in the disposition. The liquidator can also refer it to ASIC.
John: So that brings me to the second stage. ASIC has been given the power to make administrative orders to recover property for the benefit of the liquidators and the creditors. It can do that without having to go to court and engage in expensive litigation, and it can levy charges, fines and orders for compensation.
John: Thirdly, the creditors can pursue those responsible directly. They probably wouldn’t do that if the liquidator or ASIC was doing it.
John: And then finally, of course, the tax office is involved and the tax office has been given the power to recover GST and other tax obligations directly from those involved in Phoenix activity. So it becomes a personal liability to pay the tax that the company has tried to avoid.
Dan: So how can Murdoch Lawyers help?
John: Well, if a client or prospective client can see that this sort of activity is affecting their business, they can come to us. We can advise them of their rights and how to pursue the people who’ve been involved and how to best preserve their position should a liquidation eventually occur.
Dan: John, thanks for joining me.
John: My pleasure. Thanks, Dan.