Director Duties and Corporate Law Regime in Relation to Illegal Phoenix Company Activity

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Business and Company Law

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In Australia, the Corporations Act 2001 (Cth)1 is the key legislation which governs the
operations of companies in the country. As per this Act, various duties are imposed on
directors to ensure that they conduct their operations in an ethical manner without
adversely affecting the interest of the company or its stakeholders. The directors have to
comply with these regulations in order to avoid legal consequences while they are
discharging their duties.2 It is the duty of directors to ensure that they did not engage in
illegal phoenix company activities while conducting their business operations or else they
could face legal charges. Illegal phoenix activity is referred to the involvement of intentional
transfer of assets from an indebted company to a new corporation in order to avoid the
liability towards creditors, tax authorities or employee entitlements.3 The current director
duties are focused on providing relevant guidelines to ensure that they did not engage in
illegal phoenix activity; however, current policies are not suitable to address these issues.
There are many gaps in the current policies which make it difficult to determine whether
directors have engaged in illegal phoenix activity or not. It is also difficult to impose
penalties on the directors due to lack of effective guidelines. This essay will evaluate the
effectiveness of current director duties and corporate law regime in addressing the issue of
illegal phoenix company activity. Moreover, this essay will evaluate any proposed reforms
and their effectiveness in achieving this objective.
While performing their role, a range of duties and obligations are imposed on directors in
Australia under the Corporations Act. Directors act for the benefit of the company as a
whole based on which they have to act while focusing on the interest of all members
collectively. Directors can be held accountable for their actions in case they violate their
duties which are given under the Corporations Act. In case directors engage in illegal
phoenix activity, then they can face legal penalties. It is referred to those actions which are
intentionally taken by directors in relation to transfer of assets from an indebted
corporation to a newly formed company.4 The objective of this activity is to avoid the
payment of taxes, employment entitlements or debt of creditors. In this process, the
1 Corporations Act 2001 (Cth)
2 ASIC, Directors’ liabilities when things go wrong (2019) <
https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-
guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/ >.
3 Jeffrey F. Fitzpatrick et al., Business and corporations law (LexisNexis Butterworths, 3rd ed, 2017).
4 ASIC, Illegal phoenix activity (2019) < https://asic.gov.au/about-asic/contact-us/how-to-complain/illegal-
phoenix-activity/ >.

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directors leave the debts of the old company as it is and file application to place such
company into liquidation. They wound up the company by providing that it did not have
resources to pay off its debts. While at the same time, a new company continues the
business of the old company under a new structure.5 Usually, the new company has same
directors, and it operates in the same industry as the old corporation.
By engaging in this illegal activity, the directors avoid the payment made to the creditors,
statutory authorities and employees of the old company. It is considered as a serious
criminal activity based on which the directors who engaged in this practice can be
imprisoned. The purpose of this activity is to disadvantage creditors by avoiding the
payment of their debts and also gaining an unfair competitive advantage in the new
company.6 There are many forms of engagement in illegal phoenix activity; however, there
are key characteristics which remain same. The first characteristic is that the company fails
or unable to pay off its debts. The corporation engages in practices of intentionally denying
the payment of unsecured creditors in order to equally access the assets of the corporation
to meet the debts of the creditors. Soon after the corporation is liquidated, usually within 12
months, a new corporation starts its operations which use some or all of the assets of the
old company.7 The operations of the new company are controlled by the same parties who
are related to the directors or management of the previous corporation. These activities are
considered as illegal based on which criminal charges can be imposed on directors.
The key issue with corporate law regime in relation to illegal phoenix activity is that there is
not defined legislation or regulations which govern these activities. Technically, this practice
is not illegal in its own. However, the provisions of illegal phoenix activity are incorporated
along with the insolvency policies which make it difficult to align them with the director
duties.8 There is no definition of illegal phoenix activity given under the Corporations Act.
However, the Corporations Amendment (Phoenixing and Other Measures) Act 20129 is a key
5 Mark Harley, Latent defects in phoenix legislation (2014) <
http://www.mondaq.com/australia/x/338654/Corporate+Commercial+Law/
Latent+defects+in+phoenix+legislation >.
6 Helen Anderson, ‘The proposed deterrence of phoenix activity: An opportunity lost’, (2012) 34 Sydney L. Rev.
411.
7 Jeremy Coggins, Bianca Teng and Raufdeen Rameezdeen, ‘Construction insolvency in Australia: raining in the
beast’, (2016) 16 (3) Construction Economics and Building 38.
8 Michelle Welsh and Helen Anderson, ‘The Public Enforcement of Sanctions Against Illegal Phoenix Activity:
Scope, Rationale and Reform’, (2016) 44 Fed. L. Rev. 201.
9 Corporations Amendment (Phoenixing and Other Measures) Act 2012