What is a Phoenix Company?
Why do the powers that be not like Phoenix Companies?
The term “Phoenix Company” is one often used by Legislators, and the ATO and is often the focus of campaigns by regulators and law reform. What is not so clear, is what exactly is a Phoenix Company.
A typical Phoenix Company
The general concept is that a Phoenix Company is a company that “rises from the ashes” of a failed company. The most common scenario painted is when:
- A new company, which we call “NewCo”, begins trading as an identical business from the same location, with a similar trading name as another company, which we call “OldCo”.
- The assets of OldCo are transferred to NewCo and no consideration is paid for those assets.
- OldCo probably enters liquidation and leaves a number of creditors unpaid.
The situation as described is a bad thing for two main reasons. Firstly, there is the financial loss suffered by the creditors of the OldCo when they go unpaid. Secondly, the situation is grossly unfair for the competitors of the Phoenix Company – if a company is not paying its tax debts or trade creditors than its cost base is lowered, usually to such an extent that a competitor can’t match its pricing.
But it can be confusing
Whilst we can all agree that the Phoenix Company described above is a bad thing, there are situations that contain some of the elements described above but then vary in crucial aspects that may make it more difficult to describe the situation as a Phoenix. For example, what if the situation was as described above except that a full market price was paid from NewCo to OldCo. In that situation the position is much less clear.
So there is a difficulty in deciding what is a Phoenix Company and what is not because of the failure of the Law to actually define a Phoenix Company. Nowhere in the Corporations Law or the Tax Act is a Phoenix company defined.
ATO approach to Phoenix Companies
The ATO also has a dedicated Phoenix Company team. The ATO has also taken action against directors for what the ATO considers Phoenix Company situations.
The main target of the ATO legal actions has been “payroll” companies. That is, where a company sets up a subsidiary that employs staff. That company will incur a large debt to the ATO for deducted PAYG deductions from staff wages. The holding company simply abandons the subsidiary and creates a new payroll company. The ATO approach is to issue default assessment against the Payroll company and to also seek to have a liquidator appointed to the payroll company. The ultimate objective is to have the liquidator then pursue a debt due from the Holding Company to the payroll company in liquidation.
Law reform on Phoenix companies
The government has had several tries at introducing laws to combat illegal phoenix activity over the last ten years, and not all of them have stuck. The one that passed in February 2020 was called Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth).
The law introduces the concept of a ‘creditor-defeating disposition’, being: “A disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up.”
So basically removing an asset from a company at less than market value (or no value).
The law introduces criminal penalties for a company officer who undertakes such a disposition, or anyone who is found to be procuring, inciting, inducing or encouraging such a disposition, and the disposition was made in a manner that is seen to be “reckless to harm”.
If the transaction does not meet the level of “reckless to harm”, civil penalties can apply.
If the above advice has not answered your questions you might want to review the following pages and downloadable Information Sheets: