You may have heard of phoenix activity in the news in relation to company fraud cases. It can be very harmful for your business if it happens to you or a company that you work with so it is vital you know all about it.
What is Phoenix Activity?
Phoenix activity, or phoenixing, is the creation of a new company to take over the business of an insolvent company. It is legal when directors have exercised their duties in good faith. As Australia has limited liability for certain companies, directors are nearly always excused from being personally liable for company debts. Therefore directors can continue to run the new company without the debts of the old company. This is of course after the prior company has been liquidated.
When does Phoenixing become illegal?
It is illegal if it is done with the intent of avoiding debts to a company’s creditors. This usually involves moving a company’s assets before the directors hand it over to the external administrator. The new company can benefit from the assets, as they won’t be sold to the prior company’s creditors.
Illegal phoenixing can have large impacts on the former company’s employees as they will not be able to recover lost wages. This can also lead to an unfair advantage for directors that phoenix. To learn more about illegal phoenix activity click here.
Who Regulates Phoenixing in Australia?
Both ASIC and the ATO play key roles in regulating illegal phoenixing in Australia. Both rely on voluntary reporting to assist their inquiry into it in Australia.
How to Protect Myself from Phoenixing?
It is vital you protect yourself as you could lose serious revenue. Make sure you check companies you work with have a registered ABN. Feel free to do a credit check as well to give yourself peace of mind.
Conclusion
As you can see, phoenixing is a key issue that you should consider when starting a new business after a previous one became insolvent or when working with other businesses. Get in touch with a business lawyer for further advice to better protect you and your company.
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