Condon Associates are frequently requested to offer their professional opinion on a wide variety of complex corporate situations. One frequently requested area is their opinion of Phoenix Activities. It is quite apparent that there is a lot of confusion around this activity, so, allow us to dispel some of the confusion.
When dealing with many unsecured Creditors in a Liquidation, from time to time we are told “the Directors of the Liquidated Company have started another business with a similar name doing the same thing as the Liquidated Company, is this legal?” well the short answer is – possibly.
Put simply, phoenixing is generally where assets are transferred from one company to another company in order to avoid paying creditors, tax or employee entitlements. Whilst this is a simple definition, identification of Phoenixi Activities goes far beyond this.
Deep analysis of the situation is required and in particular, the following items need to be reviewed in order to draw a conclusion. Key areas that need to be reviewed include:
- Asset movements and their respective value to ensure they have been acquired by the new entity at market rates.
- Ensuring that all liabilities of the old company have been transferred over to the new company in full.
- Ensuring that consideration has actually been paid.
- Ensuring that the Directors of the Liquidated Company have not intentionally increased the debts of the Company before Liquidation.
- Ensuring that no corporate structuring has taken place that would allow any of the above to occur.
It is vital for an individual who wishes to assess if phoenixing has occurred, that they attempt to gain an expert opinion on the value of the assets that they are investigating, for example, use of websites or price guides can be helpful, however, the written opinion of an expert in the relevant field is highly recommended. Furthermore, it is vital that independent documentation is also sighted and collected from independent sources to evaluate the potential for phoenixing, for example, bank statements (which will detail if consideration has actually been paid for any assets), financial statements prepared by an external Accountant and copies of ATO running balance accounts (if available).
It is also important to remember that the term “Creditor” does not just mean Priority Creditors. Many people become preoccupied with Secured Creditors but even Unsecured Creditors need to be considered in this process and must be transferred over for their full value in any sale. It is also important to understand that the term “asset” does not just relate to a physical asset, the asset may also be a contact or supply agreement that has been transferred.
This article is only a brief summary of phoenixing and every situation is different. Should you require assistance in the area of Phoenix Activity identification the experts at Condon Associates are here to help with over 30 years of experience in this area. Feel free to contact our office for more information.