Phoenix activity is when a new company is registered in order to take over the activities of an insolvent or unsuccessful company. This is where the term ‘phoenix’ comes from, like a phoenix rising from the ashes. Phoenixing can be legitimate. What is illegal when it comes to phoenix activity is the stripping of assets from one company and transferring those assets to another company, in order to avoid paying debts.
Illegal phoenix activity is abundant in Australia, particularly but not limited to the construction industry. In September 2017, the Government released a consultation paper on law reform to combat illegal phoenix activity. A recent case heard in November 2017 in the Supreme Court of Queensland confirms the anti-phoenixing action of current law in Australia (Featherstone v Ashala Model Agency Pty Ltd (in liq) & Anor [2017] QCA 260).
In a nutshell, Featherstone virtually emptied the company (named Ashala) bank account in order to buy himself a $460,000 apartment in 2007. Soon after this in 2008, Ashala was de-registered and a new company was registered, also using the name ‘Ashala’ and continuing to conduct similar business activities to the original company. In 2011, an ATO audit found that the original Ashala company had a $315,103.51 tax debt; a debt that Featherstone should have known about.
Featherstone’s $460,000 transaction had rendered the company insolvent; that is, unable to meet its tax liability. So, by court order, Ashala was reinstated and appointed a liquidator. The liquidator then initiated court proceedings against Featherstone to claw back the $315,103.51 tax debt. Section 588FE(5) of the Corporations Act 2001 (Cth), which renders certain transactions voidable, was used by the courts to rule against Featherstone’s illegal phoenixing activity.
It is important to have a good understanding of your legal obligations and rights, not only under the Corporations Act, but other legislation as well. It keeps you from inadvertently undermining your interests, whether you are a director, member, creditor or have other kinds of dealings with a company.
For more information on company law matters or general commercial law enquiries please contact Shavin Silva of our office on 8410 9294 or with email using this form.