A prevalent phenomenon in the building and construction industry, the phoenix, is often a tool used by the “dodgy” end of town in order to avoid paying subcontractors and suppliers. Though not all phoenix activity is illegal or for that matter misguided, it is unfortunately more often than not conducted with a view to defeat creditor claims.
The classic scenario: The head contractor on a project is a company called “Dodgy Builder” who owes you $20,000.00. The company’s director has millions in assets, either in his own name or his spouse’s, however he says the company is in financial trouble and can’t repay the debt. One day the company is placed into voluntary liquidation and along with all the other unsecured creditors you have little hope to ever recover anything.
The next day however the director sets up another company called “Dodgy Builder 2” right next door and operates business as usual. You demand your debt from him or from the new company however he says it is a different company and has nothing to do with “Dodgy Builder”, and consequently owes you nothing. This is the classic phoenix predicament and is all too common in the building and construction industry.
What is a Phoenix company?
A “Phoenix” is a term used to refer to a company, as described above, where a new company is formed from the ashes of an insolvent company, transferring all assets from the insolvent entity to a solvent entity without transferring liabilities.
This process is a device used by many to abuse the protections afforded by limited liability corporations – directors of phoenix companies often wind up companies to avoid paying debts while retaining their business and assets. This often results in avoidance of creditors, employees and tax liabilities.
This can be a legitimate exercise for companies that go into liquidation whereby the sale transaction results in a repayment of creditors or otherwise the new company takes on the debts of the old company. Unfortunately this is all too often NOT the case.
How do phoenix companies get away with not paying creditors?
There is no express legislation defining phoenix behaviour. Currently law enforcement agencies need to prove that such directors engaged in phoenix activities intended to defeat creditors or that they intentionally defrauded in their legal documents. This can be a difficult task as most phoenix companies do not maintain complete or accurate financial records, which is an offence in itself.
ASIC and the ATO are looking into the problem closely which is estimated to cost the economy up to $3 billion. They have identified around 1,400 companies and 2,500 individuals who are suspected of phoenix behaviours, and they are seeking to press charges against them.
Protecting yourself from phoenix companies.
It is difficult to detect phoenix behaviour and it is accordingly best that industry participants keep themselves informed with information on the ASIC website and keep themselves up to date as to the activities of their peers.
There are strategies that can be put in place to secure debts and debt recovery processes which can be implemented to minimise exposure risk to Phoenix activity. It is important you seek legal advice from experienced lawyers with respect to such activity.
If you would like to minimise your risk to Phoenix activity contact our Dispute Resolution, Insolvency and Reconstruction Team:
Stipe Vuleta – Practice Manager
P 6215 9100