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The income of businesses in Australia continues to be threatened by unscrupulous directors who set up companies to complete a project and then wind up the company at the completion of the project, leaving debts owed to suppliers unpaid. The same directors then “go down the road” and set up a new company and do the same thing.
The flow-on effect of this conduct has the potential to paralyse particularly small businesses and as a consequence even the consumer is likely to be affected. This type of activity is referred to as “illegal phoenix activity”.
The genuine failure of a company can be bad luck and the laws to deal with this misfortune seeks to accommodate these cases so that the associated lack of cash flow and a winding up of a company can be managed to minimise the consequential damage to creditors and employees and other stakeholders. Any liquidation of a business has a necessary fall-out and can lead to others heading for a liquidation.
Over the years we have witnessed an increasing pattern of illegal phoenix activity referred to us by our clients who have been detrimentally affected by this conduct. The Fair Work Ombudsman of Australia commissioned a report from PwC recently to investigate the extent of this activity; ASIC has prepared a report (Report 476 released in March 2016) which outlines the types of actions that ASIC can take to detect and combat this activity.
As affected individuals, creditors can also combat this type of activity by pursuing the directors for failing to comply with their duties as directors, under the Corporations Act and at common law. Breach of directors’ duties may apply where directors have not acted in good faith in the best interests of the company or for a proper purpose, by transferring assets out of companies in a fire sale and then acquiring those assets for minimal value by a new company, by not co-operating with liquidators.
ASIC can prosecute directors for criminal activity associated with illegal phoenix activity.
Directors can also be pursued for trading a company whilst it is insolvent and unable to pay its debts as and when they fall due. Liquidators can seek to “undo” unfair transactions which benefit a new company or other related entities and reinstate value to the company in liquidation.