Essay: Phoenix Activity - Definition, Impact, And Legal Approaches." (70 Characters)

Research the topic of phoenix activity and respond to the following questions:

1. What is meant by the term ‘phoenix activity’? 

2. Can phoenix activity be beneficial to society? If so, how?

3. What purpose is behind phoenix activity? Can there be more than one purpose? 

4. Who benefits from phoenix activity and who loses? Give reasons. 

5. Is there a section of the Corporations Act 2001 (Cth) that specifically prohibits phoenix activity? If so, which section?

6. Are there sections of the Corporations Act 2001 which may be breached by phoenix activity? If so, identify at least two sections.

7. Identify (and correctly cite) at least one case in which phoenix activity was considered. What were the main issues and what was the decision? 

Read and consider several academic articles discussing phoenix activity.

8. Do you think prohibiting phoenix activity by creating a phoenix offence, or a phoenix prohibition is likely to be successful? Why, or why not?

9. How could an offence or prohibition be structured?

1. In a business country like Australia, there are numerous companies set up to continue their businesses and try to make profit from it. However, with the growing nature of the business, the companies are taken many steps or tricks to evade the tax system and avoid the government norms with an intention to earn money in an illegal way. In recent times, phoenix activities are observed in the society of Australia (Anderson, Hedges, Ramsay & Welsh, 2016). There are certain conceptions behind the origin and objectives of such activity. As per Australian Securities and Investments Commission, where a new company is set up based on assets of another old company and the intention of directors of such company is to avoid the tax and the creditors of the old company. The predecessor of the new company is same as the old one (Price, 2016). The business objectives of such newborn companies are same as the older company. However, the style to continue the business is quite different than the old one as the intention of the directors of the company is to avoid the creditors of the old company. In Giudice v Bolwell [2012] VSC 280, the principle of the phoenix activity had been observed. In Australia, two institutions are dealing with the phoenix activity. They are Australian Securities and Investigation Commission and Australian Tax office.

2. It is a fact that the phoenix activities are observed during the financial difficulties of an existing company and the intention of the directors are most of the times illegal in nature, but the nature of the activity is not illegal (Anderson et al., 2015). There is a scope for the legal way of the company. If there is a possibility to maintain the assets of the old company in a proper way and the employee of the newly born company can continue their businesses in a legal way. There are certain types of Phoenix activities are to be observed and one of the type are the legal phoenix activities that can be proved as a beneficial for the society. They are termed as a way of business rescue (DeMott, 2016). From the various definition of the phoenix activity, it is clear that a new company is set up in that process to carry on the business of the old company and the directors of both the companies are remaining unchanged. In case of the legal phoenix activity, there is no bad intention of the directors to defraud the creditors. The main objective of such company is to protect the business of the old company by adopting new techniques (Watson, 2015). Another societal approach of the activity is that it helps to increase the level of entrepreneurship. Often, there is a problem takes place regarding the appointment of new directors or the new officials in a newborn company. The problem can be avoided by such activity where the composition of the company remains unchanged. The staff and the employees of the company are encouraged by the system. In legal phoenix activity, there is no scope for the directors to breach the duty and there are certain legal tools are available to it (Barnes, 2013). In case of the winding up of the company, the rules of the Corporation Act 2001 mentioned under section 489EA will be applicable. If there is a scope regarding the evasion of tax liability, notice will be submitted to the directors of the company under section 269 of the Taxation Administration Act 1953. If there is any breach regarding the Fair Work Act 2009 made by the company, section 550 will be applicable. Therefore, it can be stated that the legal phoenix activity is beneficial for the society as it abide by all the legal norms of the Corporation Act and encourage the system of entrepreneurship (Brubaker, 2013).

Research the topic of phoenix activity and respond to the following questions:

3. In general, the phoenix activity is used in some illegal purpose. There are certain purposes laid down behind such activity. They are as follows:

• The directors of the company are often engaging themselves in such activity to avoid the creditors and the debts unpaid by them.
• The activities are adopted with a view to avoid the bankruptcy.
• The directors of such company incorporated new company by transferring all the assets of the old company and evade the tax liability.
• The directors of such corrupted companies have a bad intention to avoid the fees of the ASIC and establish a new company as an excuse (Brubaker, 2013).

There are certain phoenix activities that are legal in nature. The purposes of such activity are as follows:

• Secure the interest of the employees and staff of the old company by unchanged the composition of the new company (Lanis & Richardson, 2015).
• An attempt has been made by transferring the money of the older company and follows up the rules of the Australian Security and Investment Commission.
• An initiative has been made for the purpose of encourage the entrepreneurship.
• As in this process, all the legal aptitudes are maintained; there is no scope to breach the director’s duties in this process (Richardson, Taylor & Lanis, 2013).

4. The idea of the phoenix activities is not illegal in nature. However, there are certain persons or directors who are using the activity as a weapon to reinvest their assets in a newly incorporated company to avoid the creditors and the taxes. Mainly, when there is a financial crisis is occurred regarding the function of a company, the directors or the owners of the company set up another company to deal with this problem (Knaplund, 2015). There are certain essentials are present regarding the activities where it has been mentioned that the directors of the companies are engaged themselves in the activity when they have failed to pay the taxes and there is an intention to avoid the unsecured creditors of the old company. The newly generated company is adopting the business schedule of the old company, the structure of the company is also remaining same, and the assets of the old company are used here. However, certain tricks are adopted to avoid the ASIC’s rule. therefore, it can be stated that By this activities, the directors are vehemently get benefitted and they are able to gain money by avoiding the norms of the ASIC. On the other hand, the unsecured creditors are facing much problem regarding the same and in certain circumstances, the ASIC is also faced problem due to this. However, it should be bored in mind that not every companies under these activities are illegal in nature.

As per the statement of the Australian Tax Office, the impacts of the illegal activities are epidemic in nature. The benefitted directors are used the system with an intention to avoid the superannuation of the employees and gain illegal advantages by evading the government revenues and enforcement costs. The effects of all these things deprive certain classes of person as well as the governments. A closure regarding the superannuation system affects the interest of the employees a lot. They have to face hurdles regarding the same and the provision of the Employee Entitlement is avoided.

The government of the country has to face certain necessary problems regarding the same. It is a common intention of the directors to evade the government revenues and the taxes by adopting the phoenix activity. Taxes are one of the main income sources of the government. If there is a leaning mentality of the company’s director regarding the evasion of taxes, it will proved as a negative marking to the government and there can be certain price hike due to this (Welsh & Anderson, 2016).

5. In the continents of Australia, there is no specific law enacted regarding the phoenix activity. The activities of the directors are to be regulated by several Acts. However, there is no specific provision mentioned under the Corporation Act regarding the prohibition of such activity. There are certain common rules applicable regarding any misconduct. In case of breach of duty, provision of section 180 is applicable. If the company has failed to pay the debts, the provision of Corporation Amendments (Phoenixing and other measures) Act 2012 will be applicable. This Act enables the Australian Security and Investigation Commission to wind up the companies. In this case, section 489EA of the Corporation Act will be applicable.

Read and consider several academic articles discussing phoenix activity.

6. It is a fact that there is no particular sections in the Corporation Act that deals with the phoenix activities. However, there are certain sections that are to be violated by the directors of the alleged companies. If the directors of the company are held liable for the breach of director’s duties, provision of section 180 of the Corporation Act will be applicable in this case. The common objective of the incorporation of the new company under this activity is to avoid the creditors and the government taxes. As per rule laid down under section 180 of the Corporation Act that the directors should show certain care to its creditors and they should act diligent. According to the provision of the phoenix activity, it can be stated that the mentality of the directors are enviably affects the provision of that section and breach has been taken place regarding the same. it is also stated under the rule that the director should not use his chair inappropriately. However, in this case, there is a breach has also been observed.

Another section is section 489EA of the Corporation Act 2001. The section attracts the provision of the process of the winding up of a company. The power regarding the same is imposed on the ASIC and the institution is completing the work as per the norms stated under the Act. The object of the phoenix activity is to open a new company by winding up the old one. In certain circumstances, it can be stated that the directors are not follow the rules of the said Act. In Giudice v Bolwell [2012] VSC 280, the director of the company had wound up the old company by hiding certain facts from the ASIC. There were no liquidators engaged by the company. However, the facts are come to know when the ASIC had taken certain initiatives regarding the same.

7. The case is Giudice v Bolwell [2012] VSC 280

The issues of the case are whether the directors of the company has violated the statutory provision regarding the tax and the superannuation or not and whether all the installments are paid up by the directors of the company or not.

The court observed that there is no evidence that can proved the illegality of the directors and there is no express provision that can resist them to incorporated a new company. It was alleged by the ASIC that the directors of the company had failed to meet the requirements provided by the Corporation Act and therefore, they could not able to incorporate a new company. According to the observation by the Court, the directors of the company i.e., Mr. Giudice had taken a number of steps that can help him to maintain the debts and the superannuation cost of the old company and necessary steps are being taken by him to validate the same. Therefore, there is every option opened that indicate the essentials of legal phoenix activities. The commercial morality of the company had been followed up and there is no option that can bring any allegation regarding the illegality of the director of the company. The court has allowed the directors of the company to incorporated a new company and transfer the assets of the old company to the new company.

Answers

8. The term phoenix activity is not itself an illegal process. However, there is a necessity to prohibit the illegal phoenix activities to secure the interest of the creditors (Sullivan et al., 2016). The main problem regarding the same is that there is no particular provision present under any law of Australia. Certain sections are involved here. According to certain people, a strong provision is needed in this case. Certain investigations should be taken in this case to understand the various provisions of the phoenix activities. It is a fact that if a prohibition regarding the same can b e taken place, the offenders will face certain problems regarding the same. Provision regarding the breach of duty by the directors is attracted in this case.

Proper approach regarding the question can be an amendment in the available provision relating to the rules of the Corporation Act. Amendment is more effective than the enactment of a new prohibition clause (Lynch et al., 2015). The reason behind the same is as follows:

It is important to strengthen the provisions regarding the breach of duty by the directors. The penalty provisions should be stricter in nature. The main objective is to decrease the number of the illegal phoenix activities. More power to the ASIC should be imposed regarding the prohibition of the phoenix activities. It is to be noted that the dimension of the activity is wide in nature. Therefore, it is not possible to assemble the activity by a single prohibition. The recommendation of the provisions of the Corporation Act is need to be amended in this regard. In the words of David Bradbury, amendment can be crack down the version of the phoenix activities so that the directors of the companies should not avoid the taxes and the debts of the creditors. Apart from this, existing laws are more beneficial than the new enacted laws. There is a huge gap between the applicability of the duo. Many laws can give birth to a complexion and the real objective can be deprived for that. Therefore, it can be stated that amendment is more appropriate in comparison to the new prohibitory Act.

9. The main offence that are stated regarding the phoenix activities should be discussed in a structural manner (Muhammadi et al., 2016). As per the essentials of the activities, it can be stated that the breach made by the directors follows certain rules and the rules can be structured in a systematic way. The first motto of the directors is to defraud the creditors and avoid the taxes and the fees of the ASIC. Defrauding the creditors is opposing the duty of care principle mentioned under section 180 of the Corporation Act. The directors are transferring the assets of the old company to a new company and sometimes hide the real facts or the reason behind the same. This is an offence under section 184 of the Corporation Act. The liquidation process of those alleged companies are sometimes breached the principles stated under section 489EA of the Corporation Act 2001. Non-payment of taxes are an offence that are particularly mentioned under section 5 of the Crimes (Taxation Offences) Act 1980. If the directors of the alleged company have failed to maintain the statutory liability, they can be prosecuted under section 475 and 530A of the corporation Act.

Part A

The provision of the phoenix activity attracts certain grounds of the taxation law and Fair Work law. In recent times, it has been alleged that the directors of the companies that are involved in the illegal phoenix process have an intention to evade the taxes and it is a crime as the revenue system of Australia affected by this process. The provision of section 269-15 of Taxation Administration Act provides certain rules regarding the outcome of it. Sometimes, the directors of the company have contravened certain civil rules at the time of transferring the assets of the old companies and in this process; they are alleged to violate certain principles regarding the Fair Work Act 2009. Therefore, if any such allegations have been brought under the notice of the Australian Securities and Investments Commission, the related persons will be held liable under section 550 F.W. Act 2009. There are no particular sections or Acts that dealing with the phoenix activity and all its provisions are regulated by different sections of different Acts. Therefore, all the provisions should be structured in an effective way to curb this phenomenon. It can be possible to accumulate all the legal versions or enact a separate legislation to achieve the purpose.

Reference:

Anderson, H. L., O'Connell, A., Ramsay, I., Welsh, M. A., & Withers, H. (2015). The Productivity Commission, Corporate Insolvency and Phoenix Companies.

Anderson, H. L., O'Connell, A., Ramsay, I., Welsh, M. A., & Withers, H. (2015). Profiling Phoenix Activity: A New Taxonomy.

Anderson, H. L., O'Connell, A., Ramsay, I., Welsh, M. A., & Withers, H. (2014). Defining and Profiling Phoenix Activity.

Anderson, H., Hedges, J., Ramsay, I., & Welsh, M. (2016). Illegal phoenix activity from the insolvency practitioner's perspective. Australian Restructuring Insolvency & Turnaround Association Journal, 28(4), 23.

Barnes, L. R. (2013). The Albatross Around the Neck of Company Directors: A Journey Through Case Law, Legislation and Corporate Governance.

Brubaker, R. (2013). Expert Report regarding the Ponzi Scheme ‘Presumption’of Actual Intent to Defraud Creditors.

DeBacker, J., Heim, B. T., & Tran, A. (2015). Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States. Journal of Financial Economics, 117(1), 122-138.

DeMott, D. (2016). Accessory Disloyalty: Comparative Perspectives on Substantial Assistance to Fiduciary Breach.

Knaplund, K. S. (2015). Becoming Charitable: Predicting and Encouraging Charitable Bequests in Wills.

Lanis, R., & Richardson, G. (2015). Is corporate social responsibility performance associated with tax avoidance?. Journal of Business Ethics, 127(2), 439-457.

Lynch, K., Hobson, J., Roberts, H., & Payne, B. (2016). An analysis of the impact of Community Ownership of Local Assets; case studies from Tewkesbury District, Gloucestershire.

Muhammadi, A. H., Muhammadi, A. H., Ahmed, Z., Ahmed, Z., Habib, A., & Habib, A. (2016). Multinational transfer pricing of intangible assets: Indonesian tax auditors’ perspectives. Asian Review of Accounting, 24(3), 313-337.

Ormerod, D. C., Laird, K., Smith, J. C., & Hogan, B. (2015). Smith and Hogan's criminal law. Oxford University Press.

Price, J. (2016). The regulator: Illegal phoenix activity. Company Director, 32(5), 15.

Richardson, G., Taylor, G., & Lanis, R. (2013). The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), 68-88.

Simester, A. P., Spencer, J. R., Stark, F., Sullivan, G. R., & Virgo, G. J. (2016). Simester and Sullivan's criminal law: theory and doctrine. Bloomsbury Publishing.

Watson, S. (2015). Corporate Law and Governance. NZ Law Review, 2015, 239-717.

Welsh, M., & Anderson, H. (2016). The Public Enforcement of Sanctions against Illegal Phoenix Activity: Scope, Rationale and Reform. Fed. L. Rev., 44, 201.