Understanding Phoenixing in Corporations Law

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

CORPORATIONS LAW1
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.