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Phoenix alert: Government warns directors

114PhoenixAlertA phoenix, in Greek mythology, is a bird that rises anew from its own burning ashes. In a corporate sense, phoenixing is about the rebirth of a company, from the ashes of liquidation. Phoenixing is not illegal, as long as the newborn has not been created to avoid liabilities to creditors.

Not surprisingly the federal government is sniffing out those directors whose plans were fraudulently conceived, and is sending out a warning to directors to clip their wings.

Phoenix activity: kosher or not?

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.

“The DIN will identify directors with a unique number, but it will be much more than just a number. The DIN will interface with other government agencies and databases to allow regulators to map the relationships between individuals and entities and individuals and other people.”

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

  • target high-risk individuals with a “cab rank” system for the appointment of liquidators in a phoenix case, and
  • authorise the ATO to hang on to tax refunds of directors involved in phoenix activity, then issue a Director Penalty Notice and commence recovery proceedings.

Keep your pyre cool

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.