Understanding Phoenixing in Corporations Law

This article provides an in-depth understanding of phoenixing in corporations law, including its definition, impact on the economy, and indicators to identify it. It also discusses the legal provisions and measures to combat phoenixing. Suitable for students studying corporations law or anyone interested in understanding this concept.

Running head: CORPORATIONS LAW
Corporations Law
Name of the Student
Name of the University
Author Note

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Question 1
All those individuals who are involved in the operations executed outside the purview of
taxation as well as the system of law is to be referred to as the black economy. The activities of
such individuals have attracted the attention of the apparently but the obligations sporting to
taxation have not been correctly reported by them. Such practices may include takings
understatement, frauds relating to welfare, the acceptance and payment made in cash with
respect to wages without keeping any records of the same in the books of accounts,
moonlighting, phoenixing and the avoidance of contractors in an economy of sharing from
declaring the income accrued to them. Phoenixing depicts an arrangement where commercial
establishment is set up for the purpose of solely transferring the assets of an insolvent entity to
avoid the utilisation of the assets towards the payment that requires to be made towards the
creditors. In such an arrangement, the new company thus formed namely the phoenix company
has been established to carry out the same business as that of the former. In this arrangement, all
the assets of the company declared insolvent would be transferred to the new company which has
been involved in the similar business as that of the former one and has been created for the sole
purpose of avoiding the using of the asset in administration of insolvency. Phoenixing is one of
the activities involved the black economy. Black economy is also referred to as Shadow
economy, underground economy as well as cash economy. The interactions of complex nature
with the activities, which are not legal are also a part of black economy as per the reports. Such
activities also include money laundering and terrorist financing1.
The expression phoenixing demarcates the arrangement that has been carried out by
corporations by shifting their assets or profits, which it has earned through conducting its
1 Roberts, Shane, and Sam Marsh. "New bill to ground illegal phoenixing." (2019) Governance Directions 71.3: 153.

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business affairs to another entity and carry out business affairs through that entity. This act of
shifting the profits and assets of the company to another is an intentional act that has been carried
out with the sole purpose of avoiding the repayment of debts to the creditors or evading tax
liabilities. Such a shifting may also be resulted for the purpose of paying the employees their
entitlements2.
The issue of phoenixing has been made evident in the case of Australian Securities and
Investment Commission v Somerville & ors [2009] NSWSC 934. In this proceeding, a solicitor has been
involved in the process of phoenixing where he has assisted the directors of the company in question to
contravene the liabilities they have been owning by pursuing the activity of phoenixing and by having
involvement in the abatement of the same. This proceeding has laid the foundation of a warning that has
been targeted towards the legal advisors while shooting for a restructure in a business. They have been
made aware with this proceeding to ensure extra cautiousness while advising the clients with respect to
the restructuring to not exceed the legitimate limits or legality with their advices. There are certain cases
phoenixing has exceeded the boundaries of legal entity. This can be illustrated with the instances where
the companies has been intentionally created for the purpose of avoiding the debts of another company
which has been declared to be liquidated. This new company has been formed with the sole purpose of
avoiding the debts of the existing company or to avoid any tax obligation. This form of phoenixing where
the formation of a new company has been involved with a sole purpose of evading any legal liability or
debts. The insolvent phoenixing has been affecting the corporate sector, the employees, tax authorities,
contractors and other individuals involved or related with the sector. There were other instances where
phoenixing has been structured for depriving the employees with respect to their entitlements along with
superannuation. This has been carried out within intention of gaining competitive benefit over other
entities in an unfair manner and also depriving the suppliers with respect to their payment entitlements.
There has been a considerable amount of deficit brought about in the revenue collection of the
2 Knox, Angela. "Regulatory avoidance in the temporary work agency industry: Evidence from Australia." (2018)
The Economic and Labour Relations Review 29.2: 190-206.

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government owing to the involvement of the business sector in the phoenixing activity. It has been
imposing a negative impact in the economy of the nation and deprives the whole community with respect
to the availability of funds3.
Question 2
The estimation of the cost arising out of phoenixing with respect to the Australian
economy has been posing difficulty owing to the ambiguity existing with respect to the
differentiation between rescuing of business and phoenixing. However there is certain cost that
can be trace to the activity of phoenix in which includes the loss of revenue that occurs to the
taxation authorities cost caused to FEG. This particular form of cost are easily available for
quantification. As for the estimation of a recent consultation report that has been issued by the
treasury of Australia, there has been a revelation regarding the approximate cost traced to
phoenixing, which falls under the category of an illegal activity. This revelation has estimated
the expenditure connected with illegal phoenixing to have been amounting to an annual cost of
$3.2 billion. As per the budgeted value that has been prepared by the Australian Bureau of
Statistics in 2012, there was around 1.5% over the gross domestic product pertaining to the
nation that has accounted for has been evaded owing to phoenixing. The final report that the task
force has prepared accounted for around 3% of the gross domestic product equalling to an
amount of around 50 million dollars with respect to a subsequent year of taxation 2015-16 to
have been lost owing to the process of phoenixing. In the year 2018-19, there has been
recommendation as well as measures that has been suggested to have been adopted in the budget
prepared by the task force which has been made evident in their final report. This includes
$10,000 to have been set as a boundary. An estimation of around 5000000 dollars has been
3 Rawling, Michael, and Eugene Schofield-Georgeson. "Australian Industrial Legislation 2018." (2019) Journal of
Industrial Relations.

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washed away due to phoenixing activity from the Australian economy. There has been a study
referred to as Economic Impacts of Potential Illegal Phoenix Activity that discloses the cost of
phoenixing to have been existing within the limit of $2.8 billion to $5.1 billion in each of the
years. This has been presented with respect to the activities carried out within the years 2015-164.
Question 3
The phoenixing activity is mostly visible within the sectors where a large volume of
workers mostly unskilled or semi skilled are involved as per the study presented by the
Australian Taxation Office along with the Construction, Forestry Mining and Energy Union. It
has been visible within the sectors in which the cost of labour has not been admitted to be
significant with respect to the operations relating to affairs of the business. It has been clarified
with the feedbacks extended by stakeholders that the phoenixing activity has been prevalent
within the sectors where the risk has been medium to high industries which has been involved
mainly with the construction along with building ventures. The higher risk of involvement of the
phoenixing activities within the sectors concerned with the construction and building ventures
has been owing to the concerns that has been posed within this sector with respect to the
identification for detection of the associates or the directors or even the minds controlling the
ventures. This sector of business has been made to face the phoenixing activity to the highest
degree5. Phoenixing is one of the activities involved the black economy. Black economy is also
referred to as Shadow economy, underground economy as well as cash economy. The
interactions of complex nature with the activities, which are not legal are also a part of black
economy as per the reports. Such activities also include money laundering and terrorist
4 Coggins, Jeremy, Bianca Teng, and Raufdeen Rameezdeen. "Construction insolvency in Australia: reining in the
beast." (2016) Construction Economics and Building 16.3: 38-56.
5 Anderson, Helen. "Combatting illegal phoenixing." (2018) Australian Restructuring Insolvency & Turnaround
Association Journal 30.1: 28.

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financing6. The expression phoenixing demarcates the arrangement that has been carried out by
corporations by shifting their assets or profits, which it has earned through conducting its
business affairs to another entity and carry out business affairs through that entity. This act of
shifting the profits and assets of the company to another is an intentional act that has been carried
out with the sole purpose of avoiding the repayment of debts to the creditors or evading tax
liabilities. Such a shifting may also be resulted for the purpose of paying the employees their
entitlements7.
Question 4
The chief concern that has been evidenced by regulators during the pursuance of the
activities relating to phoenixing is the concern underlying the identification of a particular
activity amounting to legal phoenixing distinguished from the illegal phoenixing. The concern
that has been presented towards the regulator at the time of combating the activities related to
phoenix is the safeguard provided by the statutory provisions contained in section 588H of the
Corporations Act 2001 (Cth), which inculcates the safe harbour rule as a defence against
insolvent trading. The provisions relating to safe harbour has been inculcated within the Act to
provide defence towards the directors who has been discharging their duties and in the
furtherance of the same has inculcated with the liability under the concept of insolvent trading.
This safe harbour has been presented within the statute with respect to the aim of providing a
defence towards the directors who has been alleged to have been involved in the insolvent
trading activity. There has been numerous provisions inculcated within the statute for the
purpose of avoiding any discrepancies within the affairs of the companies operating within the
6 Roberts, Shane, and Sam Marsh. "New bill to ground illegal phoenixing." (2019) Governance Directions 71.3: 153.
7 Knox, Angela. "Regulatory avoidance in the temporary work agency industry: Evidence from Australia." (2018)
The Economic and Labour Relations Review 29.2: 190-206.

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precincts of Australia. There has been a responsibility conferred upon the company with respect
to providing notice towards the Australian Securities and Investments Commission by lodging
the same with the motive of making the commission aware of the appointment of a director in
their company within 28 days from the affecting of such an appointment. The directors are also
conferred with the entitlement under this statute with respect to exercising their discretion in
lodging a notice of retirement with the Commission. However, there has been no pre decided
time span within which such a notice of retirement needs to be lodged by the directors towards
the commission and can be based upon the description of the director. Owing to the existence of
such difficulties as has been elected by the directors, the resignation notice in most of the cases
fails to the lost with respect to the required department belonging to the commission. Again,
there has been many instances where the date of the resignation pertaining to the directors has
been altered to have been affected at a prior date to that of the actual date for the purpose of
extinguishing the probability of holding the directors liable in relation to any illegal or authorised
activities on their parts. This requires the statue to be inserted with certain provisions which
would take away the discretionary power of the directors in in lodging notice of their resignation.
They should be mandated to launch the notice of the resignation within a period of 28 days with
respect to the time when their resignation has actually been affected. This would ensure the
directors from being indulged into activities of misconduct and contravention of the duties under
the statute. The evasion of the liabilities that would be affected by the directors of the company
would be restricted to a minimum if such a compliance have been imposed upon them with
respect to disclosure requirements. Moreover the directors would be restricted from being
involved in the phoenixing activities and resign thereafter for the purpose of evading the
liabilities incurred under the same. Moreover it would provide the commission with additional

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power to hold the directors liable with respect to the activities of illegal concern that they have
been involved in. It would be e easier for the commission to impose penalty upon the actual
director who has been associated with such an act of phoenixing or insolvent trading8.
Question 5
There have been certain indicators that provides a warning towards regulator's with
respect to the identification of the activity of phoenix staying at the initial stages. This includes:
 The failure with respect to the ability of the company to make payment of its debts can be
taken as an indicator of a probable insolvency.
 There has been a probability within the company with respect to evasion of their
liabilities of repaying the debts.
 The company should have been involving themselves in the process of evasion of
taxation and their payment with respect to the revenue department.
 The company has been defaulting and the loans are more than the assets of the company.
 A sudden change within the name of the company in accordance with the company
number along with the formation of a new company having a similar name as that of the
previous company.
 The transferring of the funds of the previous company to newly formed company by the
directors can be seen as another indicator that depicts towards the activity of insolvent
trading or phoenixing. The companies involved are generally concerned with the same
business affairs that has been the concerned in the previous company9.
8 Schmidt, Lucinda, et al. "Australian governance summit: Changing the conversation." (2018) Company Director
34.3: 24.
9 Matthew, Anne F. "The conundrum of phoenix activity in Australia: Is further reform necessary?." (2015).

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Question 6
The recommendations or the proposals that have been identified in the in the report for the
purpose of addressing the escalation the in the number of activities relating to illegal phoenixing in the
territory of Australia.
Firstly, there needs to be an alteration being brought to the Corporations Act 2001 (Cth) for the
purpose of defining the activity that involves the creation of phoenix corporations along with the
inclusion of stringent consequences for the discouraging as well as taking punitive measures to address
and deal with every such activity for the contravention.
An alteration should also be carried out with respect to the laws that governs the phenomenon of
transfer of properties. A more stringent polices should be formulated to be imposed upon the transferring
of the properties by the companies. This would regulate as well as prevent the companies from being
indulged into activities for arbitrary transfer of properties. In cases where, it has been evident that the
company has been indulging in the activity of transferring the assets as well as funds towards the other
companies without any viable basis, a strong action needs to be taken against the people involved in the
arbitrary transferring of assets to another company. It should make the company answerable to towards
the creditors and other interested person who has been entitled to be repaid with their due monetary
value10.
The statute needs to be altered in a way which would ensure the incorporation of the strict
compliances with respect to maintenance of books and records. In case the company has been failing to
provide the liquidator with adequate information that would assist him in the process of liquidation and
enquiry with respect to the causes that underlies the alleged insolvency, it needs to be interpreted as the
act of phoenixing.
10 Anderson, Helen L., et al. "Illegal Phoenix Activity: Is a'Phoenix Prohibition'the Solution?." (2017) Company and
Securities Law Journal 35.3: 184-203.

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This report has also provided a need for alteration and stringent compliance with risk profiling
requirements upon the enterprises, which belongs to the higher risk of indulging into the activity of
phoenixing. This risk profiling activities have been should be carried out with due consideration to be
taken towards the conduct exhibited by the directors on one hand and the records and maintenance of the
records on the other. Strict actions are required to be taken against the any discrepancies that might have
been noticed in the risk profiling and the same needs to be subjected to punitive measures, which might
include fines being incurred as well as disqualification being effected.
The ASIC needs to play a more active role in the regulation of these activities. Any inadequacies
that has become prominent in the process of regulating the same needs to be asked for a show cause. The
directors as well as the individuals who have been involved in such processes needs to be asked for an
explanation for every such actions taken by them in such a case11.
11 Knox, Angela. "Regulatory avoidance in the temporary work agency industry: Evidence from Australia." (2018)
The Economic and Labour Relations Review 29.2: 190-206.

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Reference
Anderson, Helen L., et al. "Illegal Phoenix Activity: Is a'Phoenix Prohibition'the Solution?." (2017)
Company and Securities Law Journal 35.3: 184-203.
Anderson, Helen. "Combatting illegal phoenixing." (2018) Australian Restructuring Insolvency &
Turnaround Association Journal 30.1: 28.
Coggins, Jeremy, Bianca Teng, and Raufdeen Rameezdeen. "Construction insolvency in Australia:
reining in the beast." (2016) Construction Economics and Building 16.3: 38-56.
Knox, Angela. "Regulatory avoidance in the temporary work agency industry: Evidence from Australia."
(2018) The Economic and Labour Relations Review 29.2: 190-206.
Knox, Angela. "Regulatory avoidance in the temporary work agency industry: Evidence from Australia."
(2018) The Economic and Labour Relations Review 29.2: 190-206.
Matthew, Anne F. "The conundrum of phoenix activity in Australia: Is further reform necessary?."
(2015).
Rawling, Michael, and Eugene Schofield-Georgeson. "Australian Industrial Legislation 2018." (2019)
Journal of Industrial Relations.
Roberts, Shane, and Sam Marsh. "New bill to ground illegal phoenixing." (2019) Governance Directions
71.3: 153.