According to recent information released by ASIC, it has won some minor battles in its ongoing war in combatting illegal phoenix activity, resulting in several convictions and disqualifications from managing corporations for an extended period of time.
The three minor battles can be summarised as follows:
The Sale of Assets without valuation or consideration – $20,000
On 12 December 2017, a former director of Greenlay Enterprises P/L (Greenlay), pleaded guilty to dishonestly using her position as a director of a company.
An ASIC investigation found that the former director of Greenlay, engaged in illegal phoenix activity by executing a Bill of Sale to sell assets of Greenlay to a related company called Pasta on the Run Pty Ltd (Pasta), of which she was also the director, for $20,000.
However, no independent valuation of the assets was conducted and no consideration was paid to Greenlay by Pasta. This conduct resulted in Ms McAulay stripping the assets of Greenlay, leaving no assets for the liquidator to realise to pay creditors of Greenlay.
The former director was discharged without conviction upon entering into recognisance in the sum of $2,000 on condition that she would be of good behaviour for two years.
The matter was prosecuted by the Commonwealth Director of Public Prosecutions.
The transfer of funds 1 day prior to the court hearing – $34,000
The former and sole director of Brimarco Pty Ltd was convicted and sentenced after pleading guilty to dishonestly using his position as a director of a company, resulting in an automatic disqualification from managing corporations for five years and a fine of $5,000.
The former director of the Company operated a business specialising in the manufacturing of trailers in Ballarat, Victoria.
An ASIC investigation found that the former director engaged in illegal phoenix activity by causing $34,800 to be transferred from the Company to a related company called Tough As Pty Ltd, of which he was also the sole director. The transfer occurred one day prior to a court hearing to wind up the Company. After the transfer, the Company had no funds to pay employees’ wages and other entitlements. The Company also had numerous creditors who were collectively owed more than $2 million.
Multiple failed entities with pattern of outstanding tax lodgements and debts to the ATO
On 18 December 2017, a father and son were disqualified from managing corporations for three and half and four years, respectively.
Their disqualification followed the appointment of liquidators to five companies they managed, which included Darling Downs Express Transport Pty Ltd, Line Haul and Bulk Pty Ltd, BTK Communications Pty Ltd, Darling Downs Express Transport Courier Services Pty Ltd and Darling Downs Express Transport Employment Services Pty Ltd.
As a result of information contained in reports lodged by the liquidators of the failed companies, ASIC was concerned that both men had failed to discharge their director duties by:
- accruing large debts owed to the Australia Taxation Office, WorkCover Queensland and unsecured creditors;
- failing to observe requirements to lodge documents with the Australian Taxation Office;
- failing to ensure the companies complied with their obligations to keep written financial records; and
- engaging in conduct amounting to illegal phoenix activity.
The Liquidators reported that the total amount owed to creditors exceeded $4.15 million across all five companies.
What is phoenix activity?
There is no statutory or legal definition of phoenix activity. ASIC notes that fraudulent or unlawful phoenix activity usually involves:
- the transfer of assets of a company (such as the business) for no or little value to another company in circumstances where the company that made the transfer:
- was unable to pay its debts when due; and
- may have been managed to avoid paying the company creditors; and
- there is a link between the management and shareholding of the two companies.
There are two main types of illegal phoenix activity and these have become a focus for regulators.
- Pre-insolvency advisers may approach directors of a failing company and suggest phoenix activities as a way to save or restructure the business. This is typically done via an asset sale or restructures that will defeat creditors’ interests. The company is left as an empty shell with no assets to ultimately be liquidated.
- In some more sophisticated cases, more common in the construction and retail industries, companies adopt phoenix activity as a business model from the outset. The directors of such companies never intend to pay trade creditors and other liabilities and, from the beginning, intend for the company’s assets to eventually be transferred to another company (e.g. completing a property development or undertaking a substantial retail fit out without paying the relevant taxation obligations). This gives an unfair commercial advantage to those that engage in such behaviour.
What you can do if you suspect phoenix activity?
If you, or a client, are considering supplying goods or services to a company ask them questions and then verify the information by using ASIC Business Checks and doing credit checks. ASIC Business Checks helps you:
- identify companies that you should not deal with
- determine whether the company you are dealing with is registered
- check whether the owners/operators of the business are banned or bankrupt
- find out about the company’s credit history
- find out how to protect yourself against default on payment by registering your interest in the company’s assets on the Personal Property Securities Register.
If you have already supplied a company with goods or services and it has since gone into liquidation or another form of external administration, report your concerns to the liquidator or administrator as they are best placed to investigate them and provide any relevant supporting documentation. ASIC relies on reports lodged by liquidators/administrators about illegal phoenix activities.