Illegal phoenix activity & ASIC

Illegal phoenix activity occurs when a company liquidates its operations to avoid paying its creditors, taxes and other regulatory payments. Before liquidation, the company transfers its assets to a newly created company which operates in the same, or similar industry and the same directors or close associates maintain control.

As part of its role as Australia’s corporate, markets and financial services regulator, the Australian Securities and Investments Commission (ASIC) targets those engaging in illegal phoenix activity, and on its website provides insight into its work in action.


What are ASIC’s powers?

Among ASIC’s wide-ranging powers, under section 206F of the Corporations Act it is able to disqualify persons from:

  • Managing corporations for up to five years.
  • Practicing in the financial services of credit industry.
  • Auditing self-managed superannuation funds.

In the case of disqualification for managing corporations, it must be shown that “within a seven-year period, the person was an officer of two or more companies, and those companies were wound up and a liquidator provides a report to ASIC alleging misconduct or about the company’s inability to pay more than 50 cents in the dollar to unsecured creditors.”


The Phoenix Taskforce

ASIC is a member of the Phoenix Taskforce, which comprises federal, state and territory government agencies who collaborate to combat illegal phoenix activity.

The aim of the taskforce is to provide a whole-of-government approach to identify, disrupt and prosecute those who engage in or facilitate illegal phoenix activity.


Recent case examples

ASIC provides details of three recent cases whereby:

  • An individual from NSW was disqualified from managing corporations for five years.
  • Two individuals from SA were disqualified from managing corporations for four years each.
  • An individual from QLD was disqualified from managing corporations for four years.

Each case involved these individuals acting as directors of multiple failed companies. Common transgressions across the cases include:

  • Failure to exercise powers and discharge duties as a director, maintain proper company records, and fulfil taxation lodgements and obligations.
  • Allowing a company to continue to trade while insolvent.
  • Failure to assist the liquidator by not providing requested information.
  • Transferring a business to a related entity for no legitimate commercial reason, prior to a liquidator being appointed.


Differing penalties across cases

ASIC does not explicitly state why only the first case attracted the highest disqualification of five years, however transgressions involved in this case not attributed to the subsequent cases include:

  • Improper use of position as director for personal benefit and to the detriment of the companies.
  • Misuse of the corporate form when transferring the business to another company, leaving insufficient assets to pay creditors.

The first case also involved the failure of five companies, compared to the failure of four companies and two companies respectively in the other cases.

Nyman Gibson Miralis provides expert advice and representation to companies and individuals the subject of investigations for corporate misconduct and financial crime.

Contact us if you require assistance.