When a company, in order to avoid paying it’s debts, liquidates, transferring its assets to a new company which continues to do business, this is known as phoenix activity. While transferring assets can be a legitimate and legal way to restructure a failing business, some phoenix activity is considered fraud. According to the Australian Taxation Office, the Australian economy loses between $2.85 and $5.13 billion annually to this type of fraud. It is essential that directors of companies engaging in phoenix activity consult with expert advisers, since illegal phoenix can lead to severe penalties, possibly even including imprisonment.
- Illegal phoenix activity is a fraudulent act whereby a new company is created from what remains of a company that has been liquidated.
- Transferring assets from a failing business to a new one can be legal if done properly.
- One way for directors of a company to avoid illegal phoenix activity is to hand over the insolvent company to an external administrator.
“When a business has been managed responsibly but still fails, it may be able to legally continue trading after liquidation as another corporate entity.”