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By Jeffrey Brown, a Principal of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group

Many of you will have seen recent publicity concerning a crackdown by the Australian Taxation Office (ATO) and other Government agencies on Illegal Phoenix Activity.

A “phoenix” company is created when an insolvent company is wound up and, immediately before the liquidation takes place, the business is transferred to another company, which typically conducts the business under a similar or even identical name.  The obvious concern for creditors of the wound up insolvent company is that they have no right to recover their debt from the new company now conducting the business.

Although there have been laws in place for many years which allow the liquidator of a wound up company to pursue a new company and its directors in the above circumstances, recovery of funds has been notoriously difficult.

There has been a recent focus on directing Government resources towards funding actions against illegal phoenix operators.

This opens up the question:  Can I ever transfer my business, and wind up the company that conducted that business, without falling foul of “illegal phoenix activity”?

The short answer is “yes”, if you do it right.

The key feature of an illegal phoenix operation is that when the business is transferred from one company to another, no (or very little) money is paid by the new company for that business.  More importantly, no regard is had to the value of the business in any accounting between the “old” company and the “new” company.

Provided careful consideration is given to the value of the business (and expert assistance should be obtained from an experienced valuer) and a proper accounting of the transaction is carried out (which makes it plain to any observer how the business was valued) and a proper amount paid, the transfer can be free from any suggestion of an illegal phoenix activity.

Further, certain factors which would significantly bring down the value of the business can be taken into account when determining how much should be paid.  Examples include existing employee entitlements, and the actual realisable value of the assets (as compared to their book value or the price originally paid for the assets).

In short, we are finding that the recent focus on “illegal phoenix activity” is catching operators who are either deliberately seeking to contravene the law, or who have not obtained the proper advice before transferring their businesses.

If you have any questions about the legal requirements when conducting a transfer of business please contact us.