Corporate Law BULAW5915: Phoenix Activity in Australia Report

This report provides a comprehensive analysis of Phoenix activity in Australia, beginning with its definition and differentiating between legal and illegal forms. It explores the societal benefits and objectives of phoenixing, while also identifying the beneficiaries and losers involved. The report delves into the legal framework, examining statutory prohibitions and potential breaches of the Corporations Act 2001 (Cth), and includes a relevant case study. Furthermore, it assesses the impact of prohibiting phoenix activity, including the challenges of defining and enforcing such prohibitions. The report concludes by discussing the structure of a phoenix offense or prohibition, offering valuable insights into this complex area of corporate law. The report is contributed by a student and is available on Desklib, a platform providing AI-based study tools.

Running head: PHOENIX ACTIVITY IN AUSTRALIA
Phoenix Activity in Australia
[Student Name:]
Federation University Australia
BULAW5915: Corporate Law

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Table of Contents
1. The definition of ‘phoenix activity’....................................................................................1
2. Societal benefits of Phoenix Activity.................................................................................2
3. The objective of phoenix activity.......................................................................................2
4. Beneficiaries and losers of phoenix activity.......................................................................2
5. Statutory prohibitions for phoenix activity.........................................................................3
6. Statutory breach by phoenix activity..................................................................................3
7. Case study on phoenix activity...........................................................................................4
8. The impact of prohibiting Phoenix activity........................................................................5
9. Structure of a Phoenix offence or prohibition....................................................................8
References................................................................................................................................10

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Phoenix Activity in Australia
Part A
1. The definition of ‘phoenix activity’
Theoretically, phoenix activity stems from the idea of a new organisation ‘rising from the
ashes’ of a previously wound up or liquidated company; the new company maintains the
same nature of business and controllers (Anderson, O'Connell, Welsh, & Withers, 2014).
Phoenix activity can be legal or illegal; where an organisation fails but on resurrection
maintains its worth, employee entitlements and other financial obligations to creditors then
this is considered as legal Phoenix activity. However, engaging in calculated, and at times
predictably repeated, liquidation in order to evade tax and other financial obligations is
considered illegal phoenix activity (Fair Work Ombudsman, 2012). As such, whereas not all
Phoenix companies are fraudulent, those formed with the intent to deceive employees and
creditors are categorised as fraudulent and as such engage in illegal phoenix activity (Margret
& Peck, 2015).
2. Societal benefits of Phoenix Activity
Phoenix activity can be socially beneficial where a company is able to genuinely reinvent
itself after failure. The benefit arises from the maintenance of employment, and services
which in themselves contribute to the general economic growth of the society. Further,
phoenix activity, also known as ‘phoenixing’, allows for efficiency in that the large
transactions costs that would accompany an insolvency process are mitigated as a business’
core structure; customers, employees, suppliers and assets, are maintained (Roach, 2010).
However, where the element of deceit to evade taxes and other financial obligations comes
into play; Phoenix activity becomes a costly socio-economic affair. Fair Work Australia in a
recent report estimates that illegal phoenix activity costs the economy well over three billion
dollars annually (ASIC, 2013).

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3. The objective of phoenix activity
With regard to purpose, there is a dearth of literature exploring the underlying motivations of
phoenix activity; it may be driven by the desire to protect a particular class of stakeholders,
the desire to gain competitive advantage or the need to survive (Matthew, 2015). Legitimate
Phoenix activity serves to allow for the continuity of responsibly managed organisations after
experiencing genuine business failure. On the other, illegal phoenix activity merely serves as
a means of generating personal wealth or creating an unfair competitive advantage for
fraudulent directors and business controllers (Australian Government, 2009).
4. Beneficiaries and losers of phoenix activity
Phoenix activity affects various stakeholders within the industry. It affects the directors,
shareholders, the business community or industry in question, employees, creditors, suppliers
or contractors, the government and the economy at large (ATO, 2017). Directors who engage
in phoenix activity benefit by way of gaining a competitive advantage over other
organisations within the same industry, this is a creation of wealth.
However, employees and creditors are likely to lose the most where Phoenix activity occurs;
employees can lose employment, wages as well as other benefits such as superannuation
which may have accrued prior to liquidation of the company. Creditors, on the other hand, are
likely to be left with a company that lacks assets which can be used to recover what is owed
to them. Additionally, governments lose a source of revenue with which to drive
development in the community by way of service delivery; that is, construction and
maintenance of hospitals, roads, education facilities among others.
Further, as previously mentioned, phoenix activity is costly to the Australian economy.
Reports estimate approximately three billion is lost through Phoenix activity annually; this is
by way of tax evasion as well as lost wages which contribute to a loss of revenue (ASIC,
2013). Evidently, legitimate Phoenix activity is of great benefit as it allows an organisation

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the opportunity to reinvent itself and contribute to economic growth. However, where
dishonesty and deceit come to play, only the fraudulent player's benefit and the larger society
stands to lose significantly.
5. Statutory prohibitions for phoenix activity
Australian legislation, that is the Corporations Act 2001 (Cth), fails to expressly define or
prohibit for Phoenix activity (Harley, 2014). The Corporations Act 2001 lacks specific
provisions that would make Phoenix activity illegal. However, the Act highlights directors
duties under ss 180-183 breach of which would amount to illegal phoenix activity.
6. Statutory breach by phoenix activity
As aforementioned, whereas the Corporations Act 2001 (Cth) lacks specific provisions with
regard to illegal phoenix activity, breach of various duties covered by the act by company
directors would amount to fraudulent phoenix activity and as such elicit legal penalties. These
obligations are provided for under ss 180-184 of the Act; additionally, the Act accords the
Australian Securities & Investments Commission (ASIC) power to liquidate abandoned
companies as a precautionary measure to illegal phoenix activity.
With this in mind, Phoenix activity may lead to a breach of the directors’ duty of care and
diligence as provided for under s 180 of the Act 2001 (Cth). This is a civil obligation that
requires company directors to exercise a reasonable degree of care and diligence while
executing their company duties. In this regard, any decision made on matters relevant to
company operations must be taken in good faith and for a proper purpose; that is, they should
be in the best interest of the organisation and not a materialisation of personal interest.
Additionally, according to s 184, where directors employ recklessness or intentional
dishonesty in the execution of their duties they are in breach of their duty to exercise good
faith and stand liable for a criminal offence. Using their position dishonestly with the

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objective of gaining personal interest amounts to a breach of duty; as previously stated,
dishonesty and self-interest are distinctive features of illegal phoenix activity.
7. Case study on phoenix activity
Various cases in Australian law provide examples of phoenix activity; Australian Securities
& Investment Commission (ASIC) v Somerville & Ors [2009] NSWSC is one such recent case
that has set precedence in this legal area. The issue in question was whether t directors and a
solicitor, Mr Somerville, were in breach of statutory obligations and liable for asset stripping
or Phoenix activity after engaging in the restructuring of several businesses that were
experiencing financial challenges.
Mr Somerville had advised several company directors to restructure their failing companies
by forming a new company and selling the old company’s assets to the new one. The terms of
restructuring included a transfer of assets, essential property, plant and equipment,
termination and re-employment of staff and issue of new shares. However, outstanding
liabilities were left under the old company; as such any creditors would lack assets to lay
claim of what was owed to them. As such, the directors were able to preserve company assets
without previous company liabilities.
The Court, in its determination, found the directors in breach of their statutory obligations
outlined under ss 181-183 of the Corporations Act 2001 (NSW). The Court was also
convinced that Mr Somerville, as an advisor, had aided the directors in the breaches
mentioned above. The directors, with the aid of their solicitor, had engaged in phoenix
activity, also known as asset stripping which amounted to breach of duty.

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Part B
8. The impact of prohibiting Phoenix activity
Three things reign true with regard to Phoenix activity; firstly there is no acclaimed
definition, legislation does not provide an express offence and finally, restructuring
businesses after failure is a recognised and accepted business activity in so far as statutory
obligations are observed (Anderson, 2015). In as much as there is no specific prohibition or
offence, there is an array of provisions in legislation that aim to combat improper conduct by
company directors that would lead to phoenix activity. These can be found in the
Corporations Act 2001 (Cth) as well as the Taxation Administration Act which provide
penalty as well as disqualification provisions for directors (Anderson, Hedges, Ramsay, &
Welsh, 2017). A significant amount of scholars believe that regulators are well equipped with
the current provisions to combat phoenix activity. However, the estimated cost of phoenix
activity to the Australian economy, as aforementioned, intimates that this activity is still
prevalent and much remains to be done.
Proponents believe that an express Phoenix offence would transmit an educative message to
directors and advisors in company matters thus increasing commitment to compliance with
duties (Anderson, Hedges, Ramsay, & Welsh, 2017). Compliance with the law is driven by
three factors which could either be normative, calculated or social. Where one relies on their
internalized values or moral reasoning to comply with the law, they are said to be
normatively motivated to comply. Compliance, in this case, is influenced by social
perceptions towards the behaviour in question. As such, express prohibition of a certain
activity increases its perception as immoral and thus motivates compliance. In the same
regard, social as well as calculated factors also support the proposal to adopt a Phoenix
prohibition. Based on this ideology, scholars argue that a Phoenix prohibition or offence is
likely to be more successful as a deterrent over current legislative provisions.

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Additionally, the lack of a specific offence plays a role in the existing loopholes and
inconsistencies in available data on phoenix activity. Without a specific definition and a
specific offence, researchers cannot conclusively quantify the incidence, enforcement or cost
of fraudulent phoenix activity (Keating, 2015). The current data paints a dim picture of
Australian Phoenix activity, thousands of companies are estimated to engage in illegal
phoenix activity annually, however, conclusive figures cannot be drawn as there is no express
criteria against which to test company activities. In this regard, it is evident that a specific
Phoenix activity offence or prohibition could aid in conclusively defining and identifying the
vice and as such make efforts in combating it more efficient and effective.
However, various challenges lie in the creation of a Phoenix offence or prohibition. Firstly is
the risk of penalising legitimate phoenix activity. This is because; creating a prohibition
would require outlining a comprehensive definition for phoenix activity. The challenge here
lies in the fact that scholars believe that no definition can fully encompass all the elements
and characteristics of illegal or fraudulent phoenix activity (Anderson, Ramsay, Welsh, &
Hedges, 2017). This is evinced in the current array of definitions available for the term
which, though comprehensive in their own right, are faced with various shortcomings. A
broad description would likely risk encompassing legitimate activity while a specific
definition would risk leaving out various aspects allowing for avoidance through the
underlying loopholes in enforcement.
Additionally, attempts to create Phoenix liability through legislation that focuses on the
aspect of ‘similar names’ has also proved limiting. The underlying objective in this regard
would be to hold directors accountable for financial obligations owed by a company with
similar name pre liquidation (Anderson, Ramsay, Welsh, & Hedges, 2017). However, this
approach also falls victim to various shortcomings in that, where a new name is adopted the
approach would be inapplicable. Legislation in this area could easily encompass legitimate

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restructuring and could also easily be avoided by directors who intend to adopt Phoenix
activity for fraudulent gain.
The discourse above prevents a compelling case both for and against Phoenix activity
prohibition by way of legislation. Stakeholders would experience positive and negative
consequences alike should a specific provision be adopted. However, it is evident that the
negative impact of creating an offence or prohibition outweigh the positive arguments
outlined above. This is because setting out specific legislation puts directors who adopt
Phoenix activity for the legitimate restructuring of their organisation at risk of facing
penalties and subsequently creates loopholes for deliberate perpetrators to exploit. As such,
guided by research, it is evident that creating a specific prohibition or offence for Phoenix
activity would be more harmful than successful.
9. Structure of a Phoenix offence or prohibition
In the event that a Phoenix offence or prohibition is adopted, the provision must satisfy
various criteria in order to be successful. These criteria collectively aid in the establishment
of a structure for a Phoenix offence or prohibition whose enforcement is successful in
deterring harmful behaviour. In developing this structure, the research has considered the
aforementioned successes and limitations on current legislation affecting phoenix activity.
This also includes an analysis of scholarly opinions as to the most effective methods for
combating phoenix activity.
Firstly, it is important that the structure of the offence constitutes a comprehensive definition
of illegal or fraudulent phoenix activity (Anderson, 2015). The definition provided should be
broad enough to encompass all harmful aspects of phoenix activity all while remaining
specific to illegal phoenix activity and avoiding or excluding elements of legitimate phoenix
activity. As recognised in the discourse above, defining Phoenix activity is crucial to any
efforts in monitoring, estimating and combating it. As such, a proper definition will serve as a

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significant feature of the offence structure and a key contributing factor to the success of the
legislation.
The definition mentioned above outlines the prohibited conduct which is a key component of
any offence. In addition to this, the prohibition or offence should also consider the element of
mental intent; that is the intention. Currently, the concept of intention is outlined in the
general duties of directors provided for under the Corporations Act 2001 (Cth). A successful
Phoenix offence provision should include intention; studies show that phoenix activity is
considered illegal or fraudulent where the intent to deceive is evident. The prohibition or
offence should expressly include this element within its structure.
The Phoenix offence structure should also comprise of criteria that allow stakeholders; that is
administrators, employees, creditors, regulators among others, to detect Phoenix activity
(Anderson, Ramsay, Welsh, & Hedges, 2017). This criterion is derived from the definition set
within the offence structure. A recognised set of criteria or elements attributable to Phoenix
activity aid stakeholders in monitoring Phoenix activity within their organisation thus serving
as a protective or precautionary measure. Additionally, it allows for improved data collection
which in essence promotes estimation and analysis of costs and other aspects of phoenix
activity.
Further, the structure of the offence should comprise of stringent deterrent measures and
sanctions for breach of duty that would constitute Phoenix activity. These measures should
clearly outline the role and powers of liquidators and administrators during the liquidation
process. Available civil penalties should be increased and criminal penalties introduced so as
to further deter fraudulent directors from asset stripping. This structure should further include
provisions that remove the benefit of phoenix activity to as to further curb the vice.
Additionally, in order to be successful, the Phoenix offence structure must include a detailed
enforcement strategy or policy. That is, having outlined the rules and available penalties, the

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prohibition should highlight how offences will be dealt with and the relevant bodies
responsible for monitoring, estimating, determining and prosecuting Phoenix offences. A
clear enforcement policy ensures efficiency in the combat against illegal phoenix activity.
In conclusion, the prohibition or offence structure should illuminate the basic elements of any
offence; the prohibited activity and the element of intent. Additionally, it should outline
elements that would aid stakeholders in identifying phoenix activity; this should begin with a
comprehensive definition. Further, the prohibition or offence should also include deterrent
measures by way of penalties and finally enforcement policies to ensure its success.

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References
Anderson, H. (2015). Phoenix Activity- A Context not a Crime. Australian Insolvency
Journal, 35.
Anderson, H., Hedges, J., Ramsay, I., & Welsh, M. (2017). Illegal Phoenix Activity: Is a
'Phoenix Prohibition' the Solution? Corporate Law Teachers Association Annual
Conference (pp. 1-26). Melbourne University.
Anderson, H., O'Connell, A., Welsh, M., & Withers, H. (2014). Defining and Profiling
Phoenix Activity. Melbourne: Melbourne Law School.
Anderson, H., Ramsay, I., Welsh, M., & Hedges, J. (2017). Phoenix Activity:
Recommendations on Detection, Disruption and Enforcement. Melbourne: Melbourne
Law School, Monash Business School.
ASIC. (2013, November 4). Small business-illegal phoenix activity. Retrieved from
Australian Securities & Investments Commission:
http://asic.gov.au/for-business/your-business/small-business/compliance-for-small-
business/small-business-illegal-phoenix-activity/
ATO. (2017, July 25). Illegal Phoenix activity. Retrieved from Australian Tax Office:
https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Illegal-
phoenix-activity/
Australian Government. (2009). Action against fraudulent phoenix activity. Commonwealth
of Australia.
Fair Work Ombudsman. (2012). Phoenix activity: Sizing the problem and matching solutions.
PWC.
Harley, M. (2014, September 14). Australia: Latent defects in Phoenix legislation. Retrieved
from Mondaq:

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http://www.mondaq.com/australia/x/338654/Corporate+Commercial+Law/
Latent+defects+in+phoenix+legislation
Keating, E. (2015, October 20). Lack of rules and data about Phoenix activity compounds the
problem. Retrieved from Smart Company:
https://www.smartcompany.com.au/business-advice/legal/lack-of-rules-and-data-
about-phoenix-activity-compounds-the-problem-research/
Margret, J. E., & Peck, G. (2015). Fraud in Financial Statements. London: Routledge.
Matthew, A. (2015). The Conundrum of Phoenix Activity: Is Further Reform Necessary.
Corporate Law Teachers Association (CLTA) Conference. Melbourne: Melbourne
Law School.
Roach, M. (2010). Combating the Phoenix Phenomenon: An Analysis of International
Approaches. eJournal of Tax Research, 90-127.