Attacking Phoenix transactions

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What is a Phoenix Company?

A ‘Phoenix’ is a mythical bird that could live for five or six centuries in the Arabian desert. After this time, it would burn itself on a funeral pyre and rise from the ashes with renewed youth to live through another cycle.

Like the bird, a ‘Phoenix Company’ is the name given to an entity that is formed to continue the business of an existing company.

This occurs when an existing company goes through the process of insolvency with assets transferred to the new company for little or no cost. When carried out illegally, the existing company is stripped of its assets and liquidated to avoid paying most, if not all, of its outstanding debts, such as tax debts, employee entitlements and other creditors.

The current challenges being faced by businesses in Australia may lead to actions involving illegal ‘Phoenix’ activity.

The economic impact of illegal Phoenix activity

It has been suggested that “illegal Phoenix activity costs employees between $31 million and $298 million in unpaid entitlements and costs the Government around $1,660 million in unpaid taxes and compliance”.

Illegal Phoenix activity directly impacts creditors, employees and subcontractors, as they are left unpaid and out of pocket. It also indirectly impacts the broader community because the company avoids having to pay tax, while at the same time, the Government often has to subsidise outstanding employee entitlements of liquidated companies.

What has been done to address the issue?

A Phoenix Taskforce was established in 2014 to detect, deter and disrupt illegal Phoenix activity. Phoenix Taskforce agencies share information and use sophisticated data-matching tools to identify those promoting or engaging in illegal Phoenix activity.

Up until 31 December 2022, the Australian Taxation Office had raised more than $1.89 billion in liabilities from audits and reviews of illegal Phoenix activities and had returned more than $901 million to the community.

What has the Government done to address illegal Phoenix activity

In recent years, the Government introduced a series of changes to address illegal Phoenix activity including:

  • Introducing a Director Identification Number
  • Laying out specific Phoenix offences
  • Extending the penalties to include advisors who assist Phoenix operators.

What legislation ensued?

“Creditor-defeating disposition” provisions were introduced into the Corporations Act 2001 in 2019. A creditor-defeating disposition is a new category of voidable transaction that can potentially be set aside upon the liquidation of a Company.

It is defined in section 588FDB(1), which provides:

  • a disposition of property of a company is a creditor-defeating disposition if:
    • the consideration payable to the company for the disposition was less than the lesser of the following at the time the relevant agreement (as defined in section 9) for the disposition was made or, if there was no such agreement, at the time of the disposition:
      • the market value of the property; or
      • the best price that was reasonably obtainable for the property, having regard to the circumstances existing at that time; and
    • the disposition had the effect of:
      • preventing the property from becoming available for the benefit of the company’s creditors in the winding-up of the company; or
      • hindering, or significantly delaying, the process of making the property available for the benefit of the company’s creditors in the winding-up of the company.

Where a court is satisfied that a transaction is voidable, it can make a variety of orders with the intent of setting the transaction aside, subject to “good faith” and other possible defences.

One of the critical changes, unlike other voidable transactions, is that the regulator has the power to make an order setting aside a transaction without a Court order.

The amendments also contain prohibitions (and related offences) in respect of:

  • An officer of a company engaging in conduct that results in the company making a creditor-defeating disposition; and
  • A person engaged in procuring, inciting, inducing or encouraging the making of a creditor-defeating disposition. This is despite the potentially broad application of the creditor-defeating disposition provisions.

What have the Australian Courts said?

The amendments received Royal Assent on 17 February 2020, before the onset of the COVID Pandemic, which saw a reduction in insolvency appointments in Australia, which we suspect naturally slowed the application of these new provisions.

One case has considered the provisions, although it was a blatant (and probably bad) example of a clear Phoenix transaction: this was IntelliComms Pty Ltd (In Liquidation) [2022] VSC 228.

The case concerned a transaction involving a business sale agreement that took place minutes before the company was placed into liquidation. The sale was to an entity controlled by the sister of the company’s director and was for approximately $20,000, which was significantly less than its true value. The Court described the transaction as featuring “all the hallmarks of a classic Phoenix transaction”, and set aside the transaction as a “creditor-defeating disposition”.

Whilst the case is helpful, we will need to wait to see further cases where transactions are attacked, particularly transactions where the situation is less clear.

One of the most interesting aspects of the new legislation is the option of requesting that ASIC make orders to that effect without a court decision potentially, which will provide liquidators with a simpler and potentially less expensive way to challenge these transactions.

It remains to be seen what approach ASIC will take to requests by liquidators to make orders setting aside a transaction as a “creditordefeating disposition”.


The key takeaways are that:

  • The regulator has the power to take direct action
  • The focus is a transfer for less than the value in all of the circumstances
  • Advisors are in the firing line
  • There are civil and criminal consequences, including for advisors.

“It has been suggested that illegal Phoenix activity costs employees between $31 million and $298 million in unpaid entitlements.”

Find out more here