What is a Phoenix Company?
Why do ASIC and the ATO not like Phoenix Companies?
The term “Phoenix Company” is one often used by Legislators, ASIC and the ATO and is often the focus of campaigns by regulators and law reform. What is not so clear, is what exactly is a Phoenix Company.
A typical Phoenix Company
The general concept is that a Phoenix Company is a company that “rises from the ashes” of a failed company. The most common scenario painted is when:
- A new company, which we call “NewCo”, begins trading as an identical business from the same location, with a similar trading name as another company, which we call “OldCo”.
- The assets of OldCo are transferred to NewCo and no consideration is paid for those assets.
- OldCo probably enters liquidation and leaves a number of creditors unpaid.
The situation as described is a bad thing for two main reasons. Firstly, there is the financial loss suffered by the creditors of the OldCo when they go unpaid. Secondly, the situation is grossly unfair for the competitors of the Phoenix Company – if a company is not paying its tax debts or trade creditors than its cost base is lowered, usually to such an extent that a competitor can’t match its pricing.
But it can be confusing
Whilst we can all agree that the Phoenix Company described above is a bad thing, there are situations that contain some of the elements described above but then vary in crucial aspects that may make it more difficult to describe the situation as a Phoenix. For example, what if the situation was as described above except that a full market price was paid from NewCo to OldCo. In that situation the position is much less clear.
So there is a difficulty in deciding what is a Phoenix Company and what is not because of the failure of the Law to actually define a Phoenix Company. Nowhere in the Corporations Law or the Tax Act is a Phoenix company defined.
ASIC’s approach to Phoenix Companies
ASIC has a dedicated team dealing with Phoenix Companies. ASIC has taken a number of legal actions in recent years against directors and their advisers where ASIC considers there has been a Phoenix Company. Remembering that there is no definition of a Phoenix company in the Corporations Law, ASIC has taken action under a variety of sections of the Corporations Act including section 180 and section 181 which talk about a directors responsibility to exercise due care and diligence and to act in good faith.
Of note, in the recent cases taken by ASIC, there is a common thread that assets were transferred from one company to another for no consideration. That is, the NewCo started using the assets of the OldCo but did not pay for those assets.
ATO approach to Phoenix Companies
Similarly, the ATO also has a dedicated Phoenix Company team. The ATO has also taken action against directors for what the ATO considers Phoenix Company situations.
The main target of the ATO legal actions has been “payroll” companies. That is, where a company sets up a subsidiary that employs staff. That company will incur a large debt to the ATO for deducted PAYG deductions from staff wages. The holding company simply abandons the subsidiary and creates a new payroll company. The ATO approach is to issue default assessment against the Payroll company and to also seek to have a liquidator appointed to the payroll company. The ultimate objective is to have the liquidator then pursue a debt due from the Holding Company to the payroll company in liquidation.
Law reform on Phoenix companies
In 2011 and 2012, Treasury released an Exposure Draft for proposed new laws for “Phoenix and Other Measures”. Assuming the new laws find their way through Parliament they are likely to become law in 2012. The new laws won’t catch all Phoenix activity but it is a further move towards personal liability for company directors in this situation. Here are the main points from the proposed legislation:
- It tries to identify phoenix companies and make a director and the Newco liable for the debts of the Newco;
- The legislation focuses on the name of the OldCo and NewCo if the name is the same or similar then the NewCo is caught by the legislation;
- If the NewCo has the same name as the OldCo then a director of the NewCo is personally liable for the debts of the NewCo for five years.
So, the legislation does not seek to help recover funds for the benefit of the OldCo, but instead squarely puts the director of the NewCo in the firing line for personal liability for all debts of the NewCo.
In essence, the proposed legislation is saying to directors that you might get away with a Phoenix Company once, but if you do, you’ll be on-the-hook for all debts of the NewCo.
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