Combating Illegal Phoenix Activities

This assignment delves into the issue of illegal phoenix activities in business. It examines various measures that governments and regulatory bodies can implement to deter and prevent such practices. The focus includes increasing fines for directors who breach their statutory duties, mandating director identification numbers for all company transactions, and enhancing ASIC's monitoring capabilities. The goal is to understand how these strategies contribute to a more transparent and accountable business environment.

Running Head: Law 1
Law

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Part A
A1: phoenix activity is the activity which is completely based on the idea of the second
company, and in this owner of the business transfers the assets of the indebted company to the
new company. New company is incorporated from the ashes of the indebted company, and this
new company involves similar business and owners. There are two types of phoenix activity that
is legal phoenix activity and illegal phoenix activity.
Legal phoenix activity includes good intention of the business controller, because controller of
the business transfers the assets of the business for rescuing the business which is not possible
with the old entity. In this controller does not intend to cheat the creditors and government.
However, things are completely different in illegal phoenix activity. It includes the transfer of
business assets from indebted company to the newly incorporated company for the purpose of
avoiding the payment of creditors and government. In this controller intends to cheat the
creditors, employees, and government.
The main difference between legal and illegal activity is that in legal phoenix activity decision of
the controller does not detriment the interest of other stakeholders, but in case of illegal phoenix
activity decision of the controller detriment the interest of the creditors (ASIC, 2013).
A2: if phoenix activity is conducted by controller with good intention then this activity is
considered beneficial for the society because it provide option related to revaluation of the assets.
The main purpose of illegal phoenix activity is to defrauding the creditors and other stakeholders
of the company. In other words, illegal phoenix activity includes the transfer of business assets

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from the indebted company to the new company with the intention of avoiding the payments of
the business.
Directors of the business take shield of the phoenix activity for the purpose of defrauding the
creditors by not paying their due amounts, governments by not paying the revenue, and
employees by not paying their entitlement. This activity not only affects the creditors and other
stakeholders related to the company but also affects the society. Complete society is affected by
the phoenix activity, because funds which are allocated for society such as funds contributed in
roads, hospitals, schools, etc. are deprived by the organization engaged in phoenix activity.
Therefore, Phoenix activity cannot be beneficial for society and reasons of this conclusion are
stated below:
 Company obtains unfair competitive advantage over their competitors.
 Company fail to fulfill their obligations related to statutory requirements.
 Company fails to pay entitlements and wages to the workers and employees.
 Company does not pay the amount due to suppliers and creditors.
Various actions and measures are taken by the company for resolving the issue related to the
phoenix activity (ASIC, 2016).
A3: there are number of reasons for which business controller engaged in this activity and these
reasons varied as per the intention of the parties. However, the most important reason of this

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activity is to ensure the simple winding up process of the company instead of lengthy process of
deregistering the company through ASIC.
As stated above purpose of this activity varied as per the intention of the controller such as if
intention of the controller is illegal then controller engaged in this activity for defrauding their
creditors. If intention of the controller is legal then controller engaged in this activity for
restructuring the business.
It must be noted that some other purpose of this activity are also there, and these purposes are
stated below:
 Phoenix activity helps in reducing the cost related to the liquidation and make it faster.
 Phoenix activity makes this procedure simpler.
 For restructuring the business of the company.
 Provide opportunity to the liquidator for conducting the investigation at earlier stage
(Mccoy, 2012).
A4: this activity provides various benefits to the directors and other officers of the organization.
As directors and other controllers able to incorporate new company without paying the amount
of debt incurred in old company. In this activity controller of the business carried the business of
the old company in the new company, without accepting the liabilities of the old company.
In other words, business assets related to the old company are transferred to the newly
incorporated company, but liabilities of the old company are not transferred to this new
company. In other words, controllers of the business carried their business without discharging
the liabilities incurred by them in the old company.

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However, if phoenix activity is conducted in legal manner then this activity provides the
opportunity to the controller for restructuring their business and earn profit (Henderson, 2014).
A5: Corporation Act 2001 recognizes the concept of phoenix activity, but not even a single
section or provision of the Corporation Act 2001 prohibits the phoenix activity specifically. It
must be noted that phoenix activity is not inherently illegal, but it becomes illegal when
controller of the business intends to defraud the creditors. Therefore, there is no section which
specifically prohibits this activity.
A6: directors of the company breach various sections of the corporation Act 2001 by engaging in
the phoenix activity for the purpose of defrauding their creditors, and some of these sections are
stated below:
Section 180 of the Corporation Act 2001 states, it is the statutory duty of directors and other
officers of the corporation to conduct their actions and exercise their power with proper care
and diligence. Reasonable care and diligence would be taken in such manner that would be taken
by any person who is appointed as director or officer of the company or holds the office of the
director or officer of the company and perform similar responsibilities.
These section further states, while making any judgment related to the company, directors or
officers of the company must comply with above stated provisions. Directors or officers comply
with above stated provisions if such directors or officer:
 While making the judgment related to the business act in good faith and for proper
purpose.
 Does not hold any material personal interest in the business judgment.

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 Must inform the other directors of the board related to the subject matter of the business
judgment.
 Directors must ensure that judgment making by them is in the best interest of the
company. Belief of the directors that they make business judgment in the best interest of
the company is considered true belief if any reasonable person in similar situation holds
the similar belief (Corporation Act, 2001).
If directors of the company engaged in illegal phoenix activity, then such directors breach the
statutory obligation stated under section 180 of the Act because directors fail to exercise their
power with proper care and diligence. In this judgment taken by the directors of the company is
not in good faith and in the best interest of the company.
Section 181 of the Corporation Act imposed obligation on the directors and officers of the
company to act in good faith, and conduct only those action which serves in the best interest of
the company. This section further states, that operations conducted by the directors and officers
of the company must be conduct for proper purpose (Corporation Act, 2001).
Section 181 of the Act is considered as civil penalty provision under section 1317E of the Act. If
any individual in the capacity of director breach the provisions of this section then Court
determine it contravention of complete section because directors and other officers of the
company make the business judgment for purpose which is not proper.
A7: in case ASIC v Somerville [2009] NSWSC 934, decision was taken by the Supreme Court of
NSW, and this case was considered as most important case because in this solicitor was also held
liable for providing the advice to the directors for engaging in illegal phoenix activity. In this,

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solicitor was influencing the directors of the company for the purpose of indulging them in
phoenix activity. This case was treated as warning issued to the directors and other professionals
who are breaching their duties under the veil of restructuring. Advice related to phoenix activity
was provided by Mr. Somerville to their clients who were going through some financial
difficulties in their business. Almost 8 clients of Mr. Somerville act on the advice given by Mr.
Somerville. As per the advice given by Mr. Somerville, all the clients must ceased the business
of their old company because it was not possible to restructure the business of the old company,
and incorporate new company which carried the business of the old company. Business Assets of
the old company were transferred to this new incorporated company, and contract of transfer
states that:
 Assets of old company were transferred to new incorporated company.
 In lieu of the assets transferred, new incorporated company issue V class shares to the old
company in the form of consideration, and these shares provide right to the old company
to claim all the dividends declared by the new company in respect of these shares.
 Old company terminates its employees, and new company offered employment to these
terminated employees.
 New Property, plant and equipment leases are taken by the new company.
 Both liabilities and pre-transfer debts of the old company were remained with the old
company, and these liabilities and debts were not transferred to the newly incorporated
company.
In this case, directors of the company were engaged in phoenix activity which was advised by
Mr. Somerville. This case was considered as warning for both directors and solicitors of the
company, because in this solicitor give wrong advice to the directors and they act on that advise.

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Court further stated that both, Mr. Somerville and other defendants of the company were liable
under civil penalty provision. Court also held that directors of the company breach their statutory
duty under section 180, 181, and 182 of the Act.
Part B
A8: presently there is no provision which specifically prohibits the phoenix activity because
phoenix activity is not itself illegal, but if it carried with the intention of defrauding the creditors
then only it is considered as illegal. By introducing the phoenix offense, government and other
authorities can reduce the loss caused to creditors and other stakeholders of the organization
from the phoenix activity. Introduction of Phoenix offense help in sending the strict message to
the business organizations operating in Australia and those professionals who advised phoenix
activity. This message creates the strict liability on directors of the company which encourage
the directors and other officers of the company to perform their function in the best interest of
the company and complied with the statutory obligations stated under corporation Act 2001.
For the purpose of introducing phoenix prohibition, authorizes must consider some important
elements which encourage the individual to comply with the law. These elements include
normative motivation, social motivation, and calculative motivation (CPA, n.d.).
Normative motivation states the internal values and morals of the individual, and it states that
individual is pressurized by their internal values to follow the rules and not engaged in any
illegal activity. These values prevent the individual to conduct any action which is not
considered right, and not accepted by the society. Through phoenix prohibition, this motivation
can be used for reducing the offenses related to phoenix activity.

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There is one more element which is known as social motivation, and this motivation includes the
desire off reputation and respect. Those individuals who want reputation and respect in the
society will never engaged in any such activity which spoils their reputation.
Calculative motivation includes those factors which are related to economic loss such as fear of
penalty and compliance cost. In this category, individuals are mainly motivated from the
economic factors and they have fear of economic loss.
It must be noted that above stated factors can be used for introducing the phoenix offence or
phoenix prohibition, for the purpose of reducing the phoenix activity.
A9: following factors can be used by the government for the purpose of structuring the phoenix
prohibition:
 Government can make the provision that it is necessary for directors to use their director
identification number in every transaction related to the company. This will make easy
for department to locate the actions of the directors and keep check on the directors of the
company.
 Liquidators of the company must include the provisions and standards through which
phoenix activity can be suspected and investigated at the earlier stage of the business.
 Government must increase the fine related to phoenix activity such as maximum
criminal fine if directors of the company breach heir statutory duties must be increased up
to 4,500 penalty units so that it get similar consistency which the other offenses of serious
nature under corporation Act 2001. Therefore, it becomes necessary to increase the
maximum civil penalty and criminal fines for breaching the statutory duties of director.

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 Officers of the ASIC must review the performance and actions of the company on time to
time.
References:
Anderson, H. & Hedges, J. (2017). Illegal Phoenix Activity: Is A ‘Phoenix Prohibition’ The
Solution?. Retrieved on 8th September from:
http://law.unimelb.edu.au/__data/assets/pdf_file/0004/2271613/Anderson-et-al,-Illegal-

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Phoenix-Activity-Is-a-Phoenix-Prohibition-the-Solution-2017-Company-and-Securities-
Law-Journal-forthcoming.pdf.
ASIC v Somerville [2009] NSWSC 934.
ASIC, (2013), Small business-illegal phoenix activity. Retrieved on 8th September from:
http://asic.gov.au/for-business/your-business/small-business/compliance-for-small-
business/small-business-illegal-phoenix-activity/.
ASIC, (2016). Illegal phoenix activity. Retrieved on 8th September from:
http://asic.gov.au/about-asic/contact-us/how-to-complain/illegal-phoenix-activity/.
Corporation Act 2001- Section 180.
Corporation Act 2001- Section 181.
CPA. New moves to stop illegal phoenix company activity. Retrieved on 8th September from:
https://www.intheblack.com/articles/2017/06/06/illegal-phoenix-company-
activity.
CPA. New moves to stop illegal phoenix company activity. Retrieved on 8th September from:
https://www.intheblack.com/articles/2017/06/06/illegal-phoenix-company-activity.
Henderson, A. (2014). Phoenix activity recommendations on detection, disruption and
enforcement. Retrieved on 8th September from:

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http://law.unimelb.edu.au/__data/assets/pdf_file/0020/2274131/Phoenix-Activity-
Recommendations-on-Detection-Disruption-and-Enforcement.pdf.
Mccoy, O. (2012). Phoenix Fever. Retrieved on 8th September from:
https://www.claytonutz.com/knowledge/2012/september/phoenix-fever.