BULAW5915 The Legal Concept of Phoenix Activity

Added on -2020-02-24

| BULAW5915| 13 pages| 2839 words| 35 views

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Running Head: Law 1Law
Law2Part AAnswer 1: concept related to phoenix activity is usually reflected with the idea of a second company, in which it is newly incorporated. This new company is generated from the ashes of itsfailed predecessor in which both controllers and business of the second company are same. In other words, phoenix activity means incorporating a new company for the purpose of takeoverthe insolvent business of a predecessor company. The legal concept of phoenix activity is the genuine failure and liquidation of the company. There are two forms of phoenix activity that are legal and illegal:Legal phoenix activity- it covers situations when another business is started by the previous controller because previous entity of controller is failed to rescue its business. Illegal phoenix activity- it is similar to the legal phoenix activity, but the main intention of the controller is to exploit the corporate form for the purpose of detriment the interest of unsecured creditors, employees, and tax authorities. In other words, directors of the company intentionally avoid the payment of creditors. This can be understood through example, directors are conducting the operations of the company responsibly, but instead of that company is not able to pay its debts (ASIC, 2013). Answer 2: if controller conducts legal phoenix activity then only it is beneficial for the society, but in case illegal phoenix activity is conducted by the controller then situation is completely different. Phoenix activity is considered as illegal when controller incorporated new company forthe purpose of continues the business of old company which has intentionally liquidated for the purpose of avoid the payments of the debts.
Law3It must be noted that illegal phoenix activity impacts all the stakeholders of the company such as business community, employees, contractors, government and environment in following manner.Payment related to wages, superannuation, and employee entitlements are not made by the company.Business is getting unfair competitive advantage over other companies.Company fails to make payment to the suppliers.Revenue of the government is not paid, and business also imposes increased monitoring and enforcement costs on the government.Regulatory obligations are avoided by the business. It must be noted that phoenix activity not only affect above stated stakeholders, but it also affectsthe whole society by depriving the funds which can be distributed to the hospitals, schools, roads, etc. various measures are taken by government for the purpose of reducing this activity such as by punishing the offenders as per the law (ASIC, 2016). Answer 3: the main purpose of phoenix activity is to provide the way for winding up the company, rather than deregister the company by ASIC. This activity also allowed the employees to assist the government for the purpose of getting their entitlements from the failed companies. However, it must be noted that this purpose only reduces some side effects of the phoenix activity, and not eliminate the concept itself. The other purpose of phoenix activity is to reduce the cost of the liquidation, and it also increase the speed of liquidation process by removing the procedure of filing application.
Law4However, there are some other purposes also which are stated below:It provides opportunity to the directors by incorporated new company from the ashes of the old company.It provides opportunity to the liquidator to investigate the matter at earlier stage, and if required take necessary action (Mccoy, 2012). Answer 4: Generally, directors and other owners of the business get the benefit from phoenix activity because they incorporate the new company and get rid from all their liabilities in the old company. This new company starts their new business and free from old liabilities. Assets of the old company are transferred in the new company, and Controllers of the previous business choose this move to start their business in a new way by leaving the creditors, employees, and government unpaid. This activity is not beneficial for creditors, employees, government, and society in many ways, and some of these ways are stated below:Payment related to wages, superannuation, and employee entitlements which are accrued are not made by the company.Business is getting unfair competitive advantage over other companies.It affects the whole society by depriving the funds which can be distributed to the hospitals, schools, roads, etc (Henderson, 2014).Answer 5: phoenix activity is not inherently illegal, and there is no express prohibition imposed by Corporation Act 2001 on Phoenix activity. Action conducted under phoenix context is considered as illegal when intention of the directors includes detriment of the interest of creditorsand other stakeholders of the business. Wrongdoing on part of the directors is considered and whether directors breach any other law. Phoenix activity is considered as long standing issue,

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