“Rising from the ashes - Part 2” Article by Steve Marsten

Following on from my article last week interestingly, ASIC has announced a crackdown on illegal “phoenix” companies recently, it seems like welcome news. Unfortunately, with a failure to attach a clear definition of the term, enshrined in law, such a crackdown may prove ineffective.

In the business community, it is widely recognised that it is not a good look to go broke, through bankruptcy or liquidation, but it is not illegal. The illegality of insolvency comes from the specific conduct of the people at the time.

 One type of conduct that I have discussed previously in this column is the “phoenix activity”—it involves a director or directors arranging for a new company to rise from the ashes of an old liquidated company, looking deceptively similar by using effectively the same name, brand or goodwill.

 

But if the conduct is not defined under the law, then it is not a crime to engage in the conduct.

It is not always appreciated that if a company is merely suffering from cash flow difficulties, the directors personally (even without a director’s guarantee) owe a duty to creditors:

 Once a company becomes insolvent, then the directors’ duty to consider the interests of creditors gives rise to a duty not to prefer some creditors over other creditors and contributories who have claims on the fund in liquidation. Thus if directors of an insolvent company decide to prefer creditors with guaranteed debts, they may be held to be in breach of their duties as owed to the company.

 Regardless of these rules, it is not a crime to set up a “phoenix” company. There is no such thing as a “phoenix” company under the laws of our country.

 There have been some recent attempts to change the laws, but they have not yet all been passed. The driving force behind the changes has been the ATO. Interestingly, these changes were proposed following the release of a discussion paper by the ATO, which was focussed upon fraudulent “phoenix” activity and not “phoenix” activity alone. ASIC often fails to differentiate between the two and regularly refers to “phoenix” activity alone as amounting to misconduct. Contact Steve or Tina of Sothertons to learn how to identify a potential “phoenix” company on 07 4972 1300.