One of the more frustrating patterns in commercial debt recovery is encountering a debtor whose company has failed to pay — and then discovering that the same people are operating a new company, sometimes with a similar name, doing essentially the same business. This may be phoenix activity (which is illegal) or it may be a legitimate restructure (which is legal but still leaves creditors with a problem). The distinction matters for what you can do about it.
What is phoenix activity
Illegal phoenix activity occurs when a company's assets are transferred to a new entity at undervalue (or for no consideration) with the purpose of defeating creditors — while the old company is left with the liabilities and enters administration or liquidation. This is an offence under the Corporations Act 2001 (Cth), carrying civil and criminal penalties for directors involved.
In 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) strengthened the regime: it introduced a new creditor-defeating disposition offence, extended the unfair preference look-back period in some circumstances, and gave the ATO and ASIC additional tools to pursue phoenix activity. ASIC's Phoenix Taskforce has continued to operate, and prosecutions have followed.
How to identify potential phoenix activity
- The new company has the same or similar directors, shareholders, or trading name as the old one.
- The new company is operating from the same premises with the same equipment or customer base.
- The old company entered administration or was deregistered shortly after the new company was incorporated.
- Assets were sold to the new entity at below-market prices, or no consideration is apparent.
What a creditor can do
If you suspect phoenix activity, report it to ASIC (via their online reporting portal) and to the ATO (which has an interest where tax debts are also involved). ASIC can investigate and potentially pursue recovery on behalf of creditors through a liquidator.
If a liquidator has been appointed to the old company, notify them of the suspected asset transfer immediately. A liquidator has standing to pursue voidable transactions — including unfair preference payments and insolvent trading claims — and an asset transfer at undervalue is potentially recoverable.
If no liquidator has been appointed, you may need to consider whether to apply to wind up the old company yourself (which triggers a liquidator appointment) or whether the cost of doing so is justified by the likely recovery.
Direct action against the new company is generally not available unless the new company has actually assumed the old company's liabilities — which sometimes happens by contract but rarely by implication.
Contact Merion if you are facing a situation where a debtor appears to have restructured to avoid payment — early advice on the available options can significantly affect the outcome.