Disqualifying directors of phoenix companies

In November 2018, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, supported the proposal made by the Shadow Assistant Treasurer, Andrew Leigh, to allow the Commissioner of Taxation to apply to ASIC to have directors who don’t meet their tax obligations disqualified in egregious cases.

The ALP would also put in place ‘name and shame’ powers.

Directors involved in phoenix activity deliberately shut down companies to avoid their obligations to small businesses, employees and the Government (including the ATO).

In response, Ms Carnell stated: “This is another approach that could help deal in part with the problem of company phoenixing, which destroys small businesses”.

To read more of Ms Carnell’s response, go here.

 

What is phoenix activity?

Company phoenix activity involves registering a new company to takeover (rebirth) the failed or insolvent business of a predecessor company.

Phoenix activity may not involve illegal (e.g. fraudulent) conduct. Genuine company failure and liquidation (where a director responsibly manages a company and its business subsequently continues after liquidation using another company), is a legitimate use of the corporate form.

Through the concept of limited liability, the law generally excuses directors and shareholders from personal liability for the failed company’s debts. For example, directors might run a company responsibly but, despite this, the company cannot pay its debts. The directors meet their obligation to hand the insolvent company over to an external administrator (registered liquidator) who then realises the company’s assets to pay liquidation costs and creditors (including employees). The directors start a new company which operates a similar business.

What is illegal phoenix activity?

Illegal (e.g. fraudulent) phoenix activity generally involves company directors deliberately trying to avoid paying the company’s creditors. For example, directors may have run a company responsibly but, despite this, the company cannot pay its debts. The directors transfer the company’s assets to another company with the same or similar name (and for no or little value) before handing the company over to an external administrator (registered liquidator). In this way, the directors seek to avoid paying any creditors including employees through the failed company’s liquidation.

 

Information Source: https://asic.gov.au/about-asic/contact-us/how-to-complain/illegal-phoenix-activity/

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