With the firm claiming phoenix activity is on the rise, RSM partner Andrew Beck said it is no surprise that the ATO is launching a crackdown on the behaviour.
“A phoenix company is one that rises from the ashes of another company,” said Mr Beck.
“Fraudulent phoenix activity is when the company deliberately goes into liquidation to avoid paying debts such as employee entitlements, taxes, and supplier invoices, then transfers the assets to a new company and continues to trade.”
According to Mr Beck, phoenix companies leave creditors, employees and suppliers out of pocket, with no means of recourse.
While quick to note that not every company that rises from the ashes of a liquidated business is necessarily participating in illegal activity, Mr Beck reiterated the three key signs that ASIC has released to ascertain the fraudulent nature of a company:
“1. The company has failed and cannot pay its debts.
2. The company intentionally denies unsecured creditors equal assets to the company’s assets to meet and pay debts.
3. Soon after the initial company failure, a new company commences, which may use some or all of the assets of the former business, and is controlled by people related to either the management or directors of the previous company.”
Mr Beck stressed that there are circumstances in which company directors can start a new company, provided they have complied with the necessary duties and laws.
“This is a tricky area, however, and the consequences can be serious, so it pays to get experienced advice to ensure the company operates within the law at all times,” he concluded.