A long-lived bird, rising from the ashes, can be a good thing depending on the circumstances.
The phrase “phoenixing of a business” has various connotations and often is a controversial subject involving regulators such as the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO), and involves creditors, directors, advisors and insolvency practitioners.
Regularly, upon hearing the term, it is assumed that an evil has occurred and often followed by a cry for stronger legislation to prevent it happening in the future.
However, others see it as a means to continuing the operations of a business that would otherwise cease to trade with its assets sent to auction for sale and its employees forced to look for new jobs. Or said in another way, it allows the business to have a second chance. This way it seeks to maximise the value of the assets.
A company under a Deed of Company Arrangement which puts creditors’ claims on hold, and allows the debtor company to trade on, is a form of “phoenixing a business”.
The problem is no legal definition exists as to what constitutes “phoenixing”. As we know, a “Phoenix” is described in Greek Mythology as a long-lived bird that obtains new life by arising from the ashes of its predecessor.
The only Act of Parliament we are aware of, that makes use of the term “phoenixing” is the ‘Corporations Amendment (Phoenixing and other Measures) Act 2012’. However, the only place where the term is used is in the title of the Act. The word “Phoenixing” is not referred to in the body of the Act, or in any way defined.
Given no legal definition of phoenixing exists, then it is arguable as to how it is either bad (evil) or good. Rather, the actions associated with the so called “Phoenixing of a Business” are to be viewed as to whether those actions are legal or illegal. And if illegal, should the transaction be set aside (a commercial question) or the parties involved, which can include directors and advisors (such as lawyers and accountants) be prosecuted (which is a resource question for the regulators).
It is acknowledged that where the so called “Phoenixing of a Business” involves an apparent breach of a provision of the Corporations Act (with the main sections being 180-184), then in an ideal world, the parties should be prosecuted. However, the truth is we do not operate in an ideal world, as we are all subject to budgets and limited resources.
The ASIC, as an alternative to an expensive prosecution (where the facts allow), instead may impose a ‘Director Banning Order’. Many creditors though, especially where they have lost money from the failure of the original entity, will gain little comfort from a director banning order, and largely a prosecution will not assist them either.
However, the other side of the coin is the fact that so called “Phoenixing of a Business” may actually result in creditors being better off, even though individual creditors may not be.
By this we mean if a business or its assets can be sold at a price greater than is otherwise achievable, say on an auction basis, then the overall pool of cash for distribution is increased. If a higher price is achieved it should matter little if the sale is to a related entity. This will not prevent a regulator from still acting, as any sale or prosecution operate independently from each other.
The thing is, it is not the so called “phoenixing” that is the issue; rather it is the actions of the parties that need to be examined and its commercial effect.