A1: phoenix activity is the activity which is completely based on the idea of the second company, and in this owner of the business transfers the assets of the indebted company to the new company. New company is incorporated from the ashes of the indebted company, and this new company involves similar business and owners. There are two types of phoenix activity that is legal phoenix activity and illegal phoenix activity.
Legal phoenix activity includes good intention of the business controller, because controller of the business transfers the assets of the business for rescuing the business which is not possible with the old entity. In this controller does not intend to cheat the creditors and government.
However, things are completely different in illegal phoenix activity. It includes the transfer of business assets from indebted company to the newly incorporated company for the purpose of avoiding the payment of creditors and government. In this controller intends to cheat the creditors, employees, and government.
The main difference between legal and illegal activity is that in legal phoenix activity decision of the controller does not detriment the interest of other stakeholders, but in case of illegal phoenix activity decision of the controller detriment the interest of the creditors (ASIC, 2013).
A2: if phoenix activity is conducted by controller with good intention then this activity is considered beneficial for the society because it provide option related to revaluation of the assets.
The main purpose of illegal phoenix activity is to defrauding the creditors and other stakeholders of the company. In other words, illegal phoenix activity includes the transfer of business assets from the indebted company to the new company with the intention of avoiding the payments of the business.
Directors of the business take shield of the phoenix activity for the purpose of defrauding the creditors by not paying their due amounts, governments by not paying the revenue, and employees by not paying their entitlement. This activity not only affects the creditors and other stakeholders related to the company but also affects the society. Complete society is affected by the phoenix activity, because funds which are allocated for society such as funds contributed in roads, hospitals, schools, etc. are deprived by the organization engaged in phoenix activity. Therefore, Phoenix activity cannot be beneficial for society and reasons of this conclusion are stated below:
Various actions and measures are taken by the company for resolving the issue related to the phoenix activity (ASIC, 2016).
A3: there are number of reasons for which business controller engaged in this activity and these reasons varied as per the intention of the parties. However, the most important reason of this activity is to ensure the simple winding up process of the company instead of lengthy process of deregistering the company through ASIC.
As stated above purpose of this activity varied as per the intention of the controller such as if intention of the controller is illegal then controller engaged in this activity for defrauding their creditors. If intention of the controller is legal then controller engaged in this activity for restructuring the business.
It must be noted that some other purpose of this activity are also there, and these purposes are stated below:
A4: this activity provides various benefits to the directors and other officers of the organization. As directors and other controllers able to incorporate new company without paying the amount of debt incurred in old company. In this activity controller of the business carried the business of the old company in the new company, without accepting the liabilities of the old company.
In other words, business assets related to the old company are transferred to the newly incorporated company, but liabilities of the old company are not transferred to this new company. In other words, controllers of the business carried their business without discharging the liabilities incurred by them in the old company.
However, if phoenix activity is conducted in legal manner then this activity provides the opportunity to the controller for restructuring their business and earn profit (Henderson, 2014).
A5: Corporation Act 2001 recognizes the concept of phoenix activity, but not even a single section or provision of the Corporation Act 2001 prohibits the phoenix activity specifically. It must be noted that phoenix activity is not inherently illegal, but it becomes illegal when controller of the business intends to defraud the creditors. Therefore, there is no section which specifically prohibits this activity.
A6: directors of the company breach various sections of the corporation Act 2001 by engaging in the phoenix activity for the purpose of defrauding their creditors, and some of these sections are stated below:
Section 180 of the Corporation Act 2001 states, it is the statutory duty of directors and other officers of the corporation to conduct their actions and exercise their power with proper care and diligence. Reasonable care and diligence would be taken in such manner that would be taken by any person who is appointed as director or officer of the company or holds the office of the director or officer of the company and perform similar responsibilities.
These section further states, while making any judgment related to the company, directors or officers of the company must comply with above stated provisions. Directors or officers comply with above stated provisions if such directors or officer:
If directors of the company engaged in illegal phoenix activity, then such directors breach the statutory obligation stated under section 180 of the Act because directors fail to exercise their power with proper care and diligence. In this judgment taken by the directors of the company is not in good faith and in the best interest of the company.
Section 181 of the Corporation Act imposed obligation on the directors and officers of the company to act in good faith, and conduct only those action which serves in the best interest of the company. This section further states, that operations conducted by the directors and officers of the company must be conduct for proper purpose (Corporation Act, 2001).
Section 181 of the Act is considered as civil penalty provision under section 1317E of the Act. If any individual in the capacity of director breach the provisions of this section then Court determine it contravention of complete section because directors and other officers of the company make the business judgment for purpose which is not proper.
A7: in case ASIC v Somerville [2009] NSWSC 934, decision was taken by the Supreme Court of NSW, and this case was considered as most important case because in this solicitor was also held liable for providing the advice to the directors for engaging in illegal phoenix activity. In this, solicitor was influencing the directors of the company for the purpose of indulging them in phoenix activity. This case was treated as warning issued to the directors and other professionals who are breaching their duties under the veil of restructuring. Advice related to phoenix activity was provided by Mr. Somerville to their clients who were going through some financial difficulties in their business. Almost 8 clients of Mr. Somerville act on the advice given by Mr. Somerville. As per the advice given by Mr. Somerville, all the clients must ceased the business of their old company because it was not possible to restructure the business of the old company, and incorporate new company which carried the business of the old company. Business Assets of the old company were transferred to this new incorporated company, and contract of transfer states that:
In this case, directors of the company were engaged in phoenix activity which was advised by Mr. Somerville. This case was considered as warning for both directors and solicitors of the company, because in this solicitor give wrong advice to the directors and they act on that advise. Court further stated that both, Mr. Somerville and other defendants of the company were liable under civil penalty provision. Court also held that directors of the company breach their statutory duty under section 180, 181, and 182 of the Act.
A8: presently there is no provision which specifically prohibits the phoenix activity because phoenix activity is not itself illegal, but if it carried with the intention of defrauding the creditors then only it is considered as illegal. By introducing the phoenix offense, government and other authorities can reduce the loss caused to creditors and other stakeholders of the organization from the phoenix activity. Introduction of Phoenix offense help in sending the strict message to the business organizations operating in Australia and those professionals who advised phoenix activity. This message creates the strict liability on directors of the company which encourage the directors and other officers of the company to perform their function in the best interest of the company and complied with the statutory obligations stated under corporation Act 2001.
For the purpose of introducing phoenix prohibition, authorizes must consider some important elements which encourage the individual to comply with the law. These elements include normative motivation, social motivation, and calculative motivation (CPA, n.d.).
Normative motivation states the internal values and morals of the individual, and it states that individual is pressurized by their internal values to follow the rules and not engaged in any illegal activity. These values prevent the individual to conduct any action which is not considered right, and not accepted by the society. Through phoenix prohibition, this motivation can be used for reducing the offenses related to phoenix activity.
There is one more element which is known as social motivation, and this motivation includes the desire off reputation and respect. Those individuals who want reputation and respect in the society will never engaged in any such activity which spoils their reputation.
Calculative motivation includes those factors which are related to economic loss such as fear of penalty and compliance cost. In this category, individuals are mainly motivated from the economic factors and they have fear of economic loss.
It must be noted that above stated factors can be used for introducing the phoenix offence or phoenix prohibition, for the purpose of reducing the phoenix activity.
References:
Anderson, H. & Hedges, J. (2017). Illegal Phoenix Activity: Is A ‘Phoenix Prohibition’ The Solution?. Retrieved on 8th September from: https://law.unimelb.edu.au/__data/assets/pdf_file/0004/2271613/Anderson-et-al,-Illegal-Phoenix-Activity-Is-a-Phoenix-Prohibition-the-Solution-2017-Company-and-Securities-Law-Journal-forthcoming.pdf.
ASIC v Somerville [2009] NSWSC 934.
ASIC, (2013), Small business-illegal phoenix activity. Retrieved on 8th September from: https://asic.gov.au/for-business/your-business/small-business/compliance-for-small-business/small-business-illegal-phoenix-activity/.
ASIC, (2016). Illegal phoenix activity. Retrieved on 8th September from: https://asic.gov.au/about-asic/contact-us/how-to-complain/illegal-phoenix-activity/.
Corporation Act 2001- Section 180.
Corporation Act 2001- Section 181.
CPA. New moves to stop illegal phoenix company activity. Retrieved on 8th September from: https://www.intheblack.com/articles/2017/06/06/illegal-phoenix-company-activity.
CPA. New moves to stop illegal phoenix company activity. Retrieved on 8th September from: https://www.intheblack.com/articles/2017/06/06/illegal-phoenix-company-activity.
Henderson, A. (2014). Phoenix activity recommendations on detection, disruption and enforcement. Retrieved on 8th September from: https://law.unimelb.edu.au/__data/assets/pdf_file/0020/2274131/Phoenix-Activity-Recommendations-on-Detection-Disruption-and-Enforcement.pdf.
Mccoy, O. (2012). Phoenix Fever. Retrieved on 8th September from: https://www.claytonutz.com/knowledge/2012/september/phoenix-fever.
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