What is a phoenix company?

Phoenix companies “rise from the ashes” with a new corporate structure that derives its assets and directors from an old entity, leaving behind the debts of the old entity and giving the new entity a clean slate.

With the Australian Taxation Office (ATO) taking a tougher stance on illegal phoenix operatives, directors can take steps to ensure they are not engaged in illegal phoenix activities, as penalties can range from fines to prison terms.

Frank Lo Pilato, managing partner of the Canberra office of accounting firm RSM Australia, offers the following tips to avoid engaging in fraudulent phoenix activity:

  1. Any sale of assets should be supported by formal valuations, as directors should ensure the vendor company receives fair value for the sale of its assets. If this does not occur, there is a strong chance that a subsequent liquidator will seek to set aside the sale, and it also carries the risk that directors may be personally exposed for any loss incurred by the vendor company.
  2. Directors should be mindful of their actions in carrying out their duties. It is an offence under the Corporations Act for directors to enter into transactions that give, either themselves or their related companies a benefit. Directors should be mindful of their actions in permitting a company to enter into any transaction of this nature.
  3. The key is that if there are insufficient assets to meet all liabilities, directors should seek professional advice early to determine whether there are alternatives available to liquidation. One alternative is a deed of company arrangement, which can allow an orderly restructure of affairs, while providing some breathing space from creditors while the restructure takes place.

The Australian Securities and Investments Commission (ASIC) has identified the three key signs of a phoenix company.

  1. The company has failed and cannot pay its debts.
  2. The company intentionally denies unsecured creditors equal assets to the company’s assets to meet and pay debts.
  3. Soon after the initial company failure, a new company commences, which may use some or all of the assets of the former business, and is controlled by people related to either the management or directors of the previous company.