Discuss About The Allegations Made Against Phoenix Activity?

Legal Phoenix Activity Has Beneficiary Impacts on Society

Question:

Discuss About The Allegations Made Against Phoenix Activity?

The term phoenix activity is related to the company law in the provinces of Australia. Australia is a business country and most of its income is gained through the business process (Anderson et al., 2015). The main object of the businesses is to gain profit and it is the common nature and mentality of the entrepreneurs of Australia. However, in certain times, it has observed that the directors or the entrepreneurs are engaging themselves in certain illegal conducts such as avoid the creditors and evade the taxes etc. This activity is known as phoenix activity. Recently, in Giudice v Bolwell, the principle and aspects of phoenix activity has been observed.

From all the recent allegations made against the phoenix activity, it is presumed that the effect of the activity is negative in nature. However, there are certain positive impacts present in case of the activities. The phoenix activities are treated as the process of business rescue (Barnes, 2013). The reason behind the same is to maintain the assets of the old company by incorporating a new company without changing its directors or the employees. In the case of legal phoenix activity, there is no scope to defraud the creditors; rather the same have increased the possibilities of the entrepreneurship. All the legal rules of the Corporation Act 2001 have been follows in the case of the winding up of the company and in case of the taxing liabilities. Therefore, it can be stated that the phoenix activities have certain beneficiary impacts created on the society.

• The activities are identified certain steps that are taken by the directors of the company to avoid the creditors of an insolvent company;
• When an old company has become insolvent, new company has been incorporated to avoid the bankruptcy of the old one through the activity;
• Sometimes, the directors of such companies are trying to evade taxes;
• In certain times, the phoenix activities are used as a process to rescue the business segment and secure the interest of the employees;
• The activity is featured to provoke the entrepreneurial mentality in case of business.
• When the newly incorporated company followed up all the legal norms regarding the Corporation Act 2001, there shall have no scope to breach any duties of the company rules.

Therefore, it can be observed that there shall be more than one purpose.

The directors of the companies who are involving in the phoenix activities can be benefitted and on the other side, the creditors and the government can be affected.

Apart from certain positive nature of the phoenix activities, the same is used to denote certain illegal purposes too. When certain directors of the company transferred all the money of an old company to a new one with an intention to avoid the creditors, they are getting benefits by way of gaining profits from the process (Brubaker, 2013). The situation accrues when the directors of the company become incompatible to pay off the debt or meet the requirements of the creditors. Tax evasion also leads the directors of the company to gain profits.

Illegal Phoenix Activity: Detrimental for Creditors and Governments

From the very nature of the purpose of the activity, it can be stated that the government has to face huge loss regarding the tax evasion. The government has to face huge loss and crisis regarding the revenue system. The creditors of the old companies are also faced certain problems as there are risk to loss their invested money.

It has been stated under that in certain circumstances, the phoenix activity follows legal rules contained under the provision of the Corporation Act 2001. However, no specific rules under the Corporation Act have been mentioned that attracts the rules regarding the phoenix activity (DeBacker, Heim & Tran, 2015). In this case, general principle of rule will be applicable such as section 180 for the breach of Director’s duty and section 489EA for the winding up of the company. Australian Security and Investigating Commission have the power to deal with the matters address for the problems relating to phoenix activity.

It has been stated earlier that there is no specific provision mentioned under the Corporation Act that particularly deal with the phoenix activity (DeMott, 2016). The general law of the Corporation Act is applicable in this case.

 In any case, where the director of a company wind up the company by not maintaining the appropriate provisions regarding the Corporation Act 2001, he shall be liable for the violation of section 489EA of the Corporation Act. If any of the directors of the company had breached their moral duty towards the employees or shareholders, he shall be held liable under the provision of section 180 of the Corporation Act 2001.

Certain allegations were brought by ASIC against the company of Mr. Giudice that the company owned by Mr. Giudice had violated the provision of tax and superannuation. It had also been alleged that the director of the company were engaged themselves in the delayed installment services. Furthermore, it was stated that Mr. Giedice had concealed the facts and incorporated a new company. ASIC told that the director of the company had violated the provisions of the Corporation Act and the company is not permitted to incorporate a new company (Knaplund, 2015).

It was observed by the court that there is no provision under the Corporation Act that can restrict the director of a company to incorporate a new one. It has also been stated that ASIC had failed to submit any direct evidence that can show the fact that the director of the alleged company had violated the provisions of the Corporation Act (Lanis & Richardson, 2015). The court observed that the acts of Mr. Giudice had been wise enough as he had maintained all the necessary documents regarding the incorporation of the new company and therefore, the court was pleased to pass an order in favor of Mr. Giudice.  

Determining Whether Activity is Illegal Phoenix Activity

The term phoenix activity has been denoted a second company that means a newly incorporated company. The new company forms from the ashes of the predecessor company and runs a business of similar kind. There are two kinds of phoenix activities observed in the corporal sector in Australia (Lynch et al., 2016). One that follows the legal rules called legal activity and the other that does not follow the same called illegal activity. Legality of the activity bears the objective to rescue an old insolvent company into a new one without changing its internal structure. In case of illegal activity, similar methods are applied but there is the directors of the company have adopted an illegal intention. The outcomes of the illegal phoenix activities are detrimental for the unsecured creditors and the section of the taxes are also affected a lot.

The phoenix activity accrues where the old company faced financial hurdles and may become insolvent during the business. Australian Securities and Investigation Commission has been empowered to deal with the problem regarding the illegal phoenix activities and the intention of the directors of these companies are taken into consideration in this process (Muhammadi et al., 2016). Illegal phoenix activity, sometimes known as the fraudulent phoenix activity had certain illegal bases that can be divided into three parts- illegal type 1, illegal type 2 and complex phoenix activity.

It is hard to prove whether the activity of the directors of as company attracted the provisions of the illegal phoenix activity. It is important to collect certain documentary evidences to support the conception of illegal activity (Ormerod et al., 2015). Necessary information regarding the company should be collected in this process and certain external observation regarding the activity of the individuals should be made. Information regarding the legality or illegality of the company can be derived from the databases maintained by the ASIC or ATO. The process to determine whether the company has attracted the provisions regarding the illegal phoenix activity, it is important to observe certain grounds. If the controller of the newly incorporated company is similar to the old company or the business objective of the old company is similar to the new company, there are certain possibilities regarding the illegal phoenix activity (Price, 2016).  

There are certain illegal outcomes of the phoenix activities such as the corporate assets are transferred to a newly incorporated company before the insolvency of the older one. The interest of the creditors is very much affected by the acts of the directors of the companies. It is not the rule that the assets of the old company will transferred to the new company: the assets can be transferred to any other entity. It has been reported in the year 2012 that the government of Australia had faced a huge loss regarding the revenue sector and the outcome of the same had created serious impact on the economy of Australia (Richardson, Taylor & Lanis, 2013).

Necessary Implementation of Strict Rules to Curb Phoenix Activity

Therefore, it can be seen that the illegal process of the phoenix activities could be harmful for the interest of the creditors. The main problem is that there is no particular provision mentioned under the Corporation Act 2001 regarding the prohibition of the phoenix activities. All the sections applied to regulate the illegal activities are common in nature. It has been reported by many sources that the rate of the illegal phoenix activities are growing in nature and that can be a potential threat for the future of the Australia. Therefore, there is a necessity to implement certain strict rules to curb this corporate phenomenon (Simester et al., 2016).

Necessary rules can be implemented either by way of legislative process or by way of amendment. However, if certain proper approaches can be taken to the old rules, there shall be no necessity to implement new rules regarding the same. if the directors of the alleged company had violated the rules under the Corporation Act 2001, he should be penalized in a more effective way. Cancellation of license or suspension from the directorship can be appropriate in nature (Watson, 2015). The ASIC are appointed to deal with the necessary problems regarding the illegal phoenix activities and with the growing nature of the activity, it is important to impose more power to the authority so that it can prohibit the activity in more effective way.

The phoenix activity is harmful if there are certain illegal steps adopted and if the intention of the directors is illegal in nature. The nature of the activity is growing and there are number of allegations are being made against many companies who are engaging themselves in the phoenix activities. The main problem regarding the same can be that there are no specific provisions mentioned under the Corporation Act 2001 to prohibit the phenomenon. Therefore, it can be stated that a structural proceeding should have to adopt to deal with the problem. The phoenix activities have attracted various provisions of various Acts and if there is a breach made regarding the same, the offender will face the penal provisions mentioned thereby.

There are certain provisions mentioned under the Corporation Act 2001 that deals with the director’s duty. In case of the phoenix activity, if any directors of the old company has incorporated a new company by violating the duty to take care and if he or she failed to act diligently, can be held liable under the provisions of section 180 of the Act (Welsh & Anderson, 2016). It is the basic rule regarding the phoenix activity that the directors of an older company are incorporated a new company and transferred all the assets of the old company to the new one. If during the process, the directors shall not disclose all the relevant documents to the colleagues or to the shareholders, he shall be liable under the provision of section 184 of the Corporation Act 2001.

In case of the winding process of the company, if necessary provisions regarding the same that are mentioned under the Corporation Act has been violated, the directors of such alleged companies will be held liable under section 489EA of the Corporation Act 2001. Further, it has been stated that if the provision regarding the taxation law has been  breached by the directors, necessary sections Taxation Administration Act 1953. It is the utmost duty of the directors of the company towards the government to pay the taxes in proper time as the economy of a nation is backed by the taxes. However, in recent times, it has been observed that it becomes a common pattern regarding the phoenix activities to evade the taxes. Therefore, these are affecting the revenue department of the government. If there is a laxity shown regarding the maintenance of taxes, section 269-15 of the Act will be applied.

In certain circumstances, it has been observed that the activities of the directors of alleged company has been violated provision of section 550 of the Fair Work Act 2009. The liabilities that are imposed on the directors of the company are statutory in nature and therefore, they are obliged to follow all the rules of the Law. In case they are failed to abide by the liabilities, they will be prosecuted under section 475 and section 530A of the Corporation Act 2001. All the provisions should be organized in a particular structure or such activities cannot be removed from the society

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