Restructuring and Anti-Phoenixing Regimes

What is Illegal Phoenix Activity?

The Australian Securities & Investments Commission (ASIC) defines illegal phoenix activity as activity that occurs when a new company, for little or no value, continues the business of an existing company that has been liquidated or abandoned to avoid paying outstanding debts, including taxes, creditors and employee entitlements.

Usually, this activity happens when company directors abandon the company, or transfer the business of an existing company without paying true or market value, leaving debts with the old company. Once the assets have been transferred, the old company is placed in liquidation or abandoned. If a liquidator or administrator is then appointed, there are no assets to recover, which means creditors cannot be paid.

Not all company failures, however, involve illegal phoenix activity, as genuine company failures can ultimately occur. A company restructure, or ‘legal phoenix activity’ can occur in order to responsibly manage the failed company.

What is Legal Phoenix Activity?

Where directors have responsibly managed a company and it subsequently fails, they can operate the same business using another company, without engaging in illegal phoenix activity – this activity is referred to as a Company Restructure.

What is the Anti-Phoenixing Regime?

In the 2018-19 federal budget, the Australian federal government announced a series of reforms to combat illegal phoenix activity. In conjunction with the wider reforms, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) amended the Corporations Act 2001 (Cth) (Corps Act), introducing new criminal offences and civil penalties for officers who do not act in the interests of the creditors and fail to prevent the company from making creditor-defeating dispositions, and the disposition has the effect of delaying the process for the property becoming available to creditors in the liquidation.

These reforms also enable ASIC to make orders (whether at its own initiative or on request from liquidators) to recover assets lost through the illegal phoenixing activity or, require a person to pay to the company an amount that, at ASIC’s discretion, fairly represents the benefits that the person has received because of the disposition.

The first decision of a court enforcing the new regime was handed down by the Supreme Court of Victoria in Re Intellicomms Pty Ltd (in liq) [2022] VSC 228.

The Plaintiffs in the matter were Mr Franklin as Joint and Several Liquidator of Intellicomms Pty Ltd (in liq) (first Plaintiff), Mr Vrsecky as Joint and Several Liquidator of Intellicomms Pty Ltd (in liq) (second Plaintiff), and Intellicomms Pty Ltd (in liq) (third Plaintiff). The Defendant in the matter was Technologie Fluenti Pty Ltd (Defendant). The Defendant was a company controlled by the sister of the third Plaintiff’s sole director.

In this matter, the third Plaintiff entered into a share sale agreement with the Defendant. In accordance with the share sale agreement, the third Plaintiff sold the majority of its assets, including its intellectual property, to the Defendant at a price well-under market value.

The court held that the sale of the business to a related party immediately prior to the company going into liquidation was a creditor-defeating disposition under section 588FDB of the Corps Act. His Honour Associate Justice Gardiner described the sale agreement as a ‘brazen and audacious example’ of illegal phoenixing activity.

His Honour made multiple orders pursuant to s588FDB of the Corps Act, including that:

• the Defendant was to deliver up to the third Plaintiff all of the property of the third Plaintiff which was the subject of the sale agreement;
• the Defendant was to transfer to the Plaintiffs, all items of intellectual property transferred to the Defendant pursuant to the sale agreement;
• the Defendant was to pay the Plaintiffs’ costs of the three proceedings in relation to the matter.

How can a Restructuring and Strategic Advisory Lawyer help?

Our team of restructuring and strategic advisory lawyers can assist you and your company, by providing detailed advice to ensure you are not in breach of any legal requirements. We can also assist small businesses in providing recommended structures to assist your company in succeeding from the start.