What is Phoenixing?
A phoenix transaction is where a business is restructured and begins trading in the name of a new entity.
Is Phoenixing illegal?
Illegal phoenix activity is often identified as a fraud-driven wealth creation strategy. Illegal phoenix activity generally involves a high frequency of phoenix activity over a relatively short period of time. Effectively, the owners of the business use the corporate framework to gain an unfair advantage. Putting a company into liquidation to avoid paying creditors effectively becomes part of their business model.
ASIC explains: "The key difference between a legitimate phoenix business rescue and illegal phoenix activity is the director’s dishonest intentions. Where a director sets out to intentionally avoid paying debts and liabilities, by transferring assets to another company without paying the true market value, then the conduct is illegal."
Is there a legal Phoenix?
Commercial Necessity Phoenix is legal and recognises the fact that sometimes the need to restructure (phoenix) may arise out of events outside the business owner’s control. This type of phoenix is considered a business rescue.
In legitimate business rescue a fair market price is established by independent valuations. A fair market price for assets, including intellectual property and goodwill of the business, is then paid. The company will also need to be able to account for where the sales proceeds went.