Hi Guys
Welcome back to the McCabe Curwood Video Blog. For those of you that missed my first video,
my name is Danyal Ibrahim and I’m an Associate in the firm’s Litigation & Dispute Resolution
Practice Group. In my first video, we looked at the process
for creditors seeking to wind up a company for unpaid debts, and we considered whether
it was possible for a director of a company to take steps to wind up their own company
in relation to a debt owed to the director personally. Today, we’ll be talking about what can loosely
be described as “sharp corporate practices” and, in particular, what’s known as illegal
phoenix activity. Illegal phoenix activity is an informal term
used to describe a situation where a new entity is created to carry on the business of the
old company but under a new name and a new ACN. This is usually done because the first company
might be in financial trouble and unable to pay its creditors, and so the directors will
normally let the first company be wound up by creditors or take steps to de-register
it, in an attempt to avoid paying creditors of the old company, such as lenders, suppliers,
employees or the ATO. The federal government has established a “Phoenix
Hotline” to allow members of the community to report illegal phoenix activity. That might trigger an investigation into dishonest
directors and result in ASIC either disqualifying directors from managing any corporations or
taking enforcement action for breach of directors duties, which could result in both civil and
criminal penalties for those involved. The regulators will look at the intention
behind the creation of the new company and the surrounding circumstances, such as whether
the new company has the same directors, same shareholders and whether it’s being operated
from the same business address as the first company. Crucially, the regulators will consider whether
the new company has paid fair market value for any assets belonging to the first company
that the new company has continued to use, such as office equipment or company vehicles. Apart from the potential risk that regulators
might investigate the matter, any liquidator of the old company is required to investigate
the affairs of the old company. If those investigations reveal that an asset
of the old company was given to the new company without payment of fair market value, the
transfer is likely to be deemed an uncommercial transaction and steps can be take by the liquidator
to reverse that transaction or recover the fair market value from the new company. In April this year, new laws were passed by
both houses of Parliament designed to strengthen enforcement powers and recovery options against
corporate employers who engage in these so-called sharp corporate practices. That Bill is awaiting Royal Assent is expected
to become law in the near future. I should make a clear distinction between
illegal phoenix activity and a genuine attempt by a business owner to restructure an existing
business or start a new business after having failed in a previous business, which is of
course not illegal if it’s done properly. If your existing business is experiencing
financial difficulties and you are thinking about starting a new business, we strongly
recommend that you seek advice as early as possible to make sure you’re not exposing
yourself or your new business to any claims. Thank you for listening, and see you next
time.