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Out of the Ashes: The Legality of Phoenix Companies

Out of the Ashes: The Legality of Phoenix Companies

The Federal Government has announced plans to target ‘dodgy’ directors with new legislation. Learn about the type of activity it targets and the liability of company directors and their advisors.

4th October 2017

In this series of posts we explore proposed legal changes that will crack down on directors trying to skirt the law. Where an old company’s assets are ‘reborn’ in a new entity, ASIC and the ATO may become involved. Register your company with LawPath today to access the legal resources you need for effective business management.

If you want to know more about your general duties as a company director, read our guide, ‘What are Director’s Duties?’

What is a Phoenix Company?

  1. A failing company cannot pay its debts
  2. The company intentionally transfers its assets to a new company
  3. The transfer allows the company to avoid paying costs associated with tax, creditors and bodies like the ATO
  4. From the new business, the old company is like a phoenix, rising from the ashes

But not all that glitters is gold…

Is a Phoenix Company Illegal?

‘Phoenixing’ is not defined in the Tax Act or Corporations Act. However, the ATO can take legal action, especially where ‘payroll’ companies abandon old subsidiaries to create new ones.

Additionally, ASIC can use the Corporations Act to take action against phoenix companies. In other words, ASIC can sue phoenix company directors for failure ‘to act in good faith’ or ‘exercise due care and diligence.’ Common to many of these cases is the failure of the new company to provide consideration (money) for the asset transfer.

ASIC has other methods to combat phoenix companies:

  • Disqualifying directors with a history of two or more liquidations
  • Funding investigations into failing companies with little assets
  • Ensuring directors comply with the liquidation obligations
  • Surveying and identifying illegal practices

You should read up on the ASIC ‘Directors’ liabilities when things go wrong’.

What if the transfer was not intentional?

Of course, not every failure is a phoenix scenario. Well-managed companies sometimes fail; after liquidation, such companies can continue to operate from another company legally. Phoenixing is an intentional attempt to evade certain costs; it is most often undertaken by the people who have control of the company.

Law Reform

The federal government plans to implement new legislation to target illegal phoenix companies. The reform will give each director a unique ‘Director Identification Number’ (DIN) so that their activities can be monitored.

Worried about your liability? Register with LawPath today and access our services to ensure your business is managed effectively.

Get on the right path. Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.

Zachary Swan

Zac is a consultant at Lawpath, Australia’s largest and fastest growing online legal platform. Since joining Lawpath, Zac has assisted 1000s of startups and small business’s with their legal needs.