Phoenixing (or a phoenix restructure) is when a new company is created to continue the operations of a company that has been deliberately liquidated in order to avoid paying its debts.
Phoenixing becomes illegal when the director’s intentions are dishonest. Where a director transfers assets to another company without paying actual market value to intentionally avoid paying debts and liabilities, the restructure becomes illegal.
Due to the growing financial stress on businesses during the Covid-19 period, there has been an increased use of illegal ‘phoenixing’ by businesses.
To avoid any potential issues with ASIC or the ATO, directors should act in the best interests of the company and its creditors. This includes making a conscious effort to find out the market value of assets.
ASIC’s Stricter Enforcement
On 23 August 2020, ASIC announced that due to increased concerns of companies engaging in malpractice to alleviate financial burdens during the Covid-19 period, ASIC will be regulating more strictly on illegal phoenixing.
ASIC are now actively identifying directors who have a history of failed companies and are conducting surveillance to ensure there is no illegal phoenix activity going on. The Australian Taxation Office has also implemented a Phoenix Taskforce that have developed data-matching tools to identify and monitor phoenix restructures.
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The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.