Putting out the fire – cracking down on illegal phoenix activity

‘We didn’t start the fire
It was always burning since the world’s been turning
We didn’t start the fire
No, we didn’t light it, but we tried to fight it’1

The Illegal Phoenix 
Illegal phoenixing is a major problem in corporate Australia.  In this post we consider what illegal phoenix activity is, how the problem is affecting the Australian economy and the recent regulatory crackdown on the issue.

In Greek mythology a phoenix is a mythical bird which obtains new life by rising from the ashes of its predecessor.  Illegal phoenix activity involves the intentional transfer of assets at an undervalue from an indebted company to a new ‘phoenix’ company.  The old company remains with its debts and is often placed into liquidation (or is left to be wound up on the application of a creditor) – stripped of any valuable assets, with nothing left to pay creditors.

How significant is the problem?
Illegal phoenixing has been estimated to cost the Australian economy more than $3 billion a year2. Employees, businesses and the Government are affected by:

  • unpaid wages and other entitlements
  • unpaid debts and unpaid tax
  • goods and services paid for, but not provided, and
  • the cost to Government of payments made to employees under the Fair Entitlement Guarantee3.

The negative economic impact of illegal phoenix activity is exacerbated by unquantifiable factors, including the unfair competitive advantage obtained by companies that avoid paying their debts.

Illegal phoenixing in the construction industry in particular lead to a Senate Inquiry, the outcomes of which were published on 3 December 2015 in the Senate Report ‘Insolvency in the Australian Construction Industry’.

Pre-insolvency advisors
The relatively recent advent of pre-insolvency advisors has undoubtedly fuelled an increase in illegal phoenix activity in Australia.

Whilst sometimes touted as a ‘guardian’ against insolvency, many are unqualified and trawl the Australian Securities and Investment Commission’s (ASIC) winding up application notices, preying on directors desperate to find a way out of the company’s financial difficulties.  Debtors all too often find themselves in situations where they incur further debts, in the form of substantial pre-insolvency advisor fees, to ‘rebuild’ their company.  In some circumstances this leads to a commercial resolution with creditors that avoids a formal insolvency, however, in many cases, the advice results in illegal phoenix activity.

Read the full article here.

[1] Chorus from ‘We Didn’t Start the Fire’ by Billy Joel, from the Storm Front Album, released 1989.
[2] Phoenix activity: sizing the problem and matching solutions, commissioned by Fair Work Australia (read the report at: http://bit.ly/2e1NNqo).
[3] Ibid.
[4] http://www.aph.gov.au/…/Report/ – ASIC, Submission 11, p. 26.

 

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