By Ben Sewell -
Snapshot
- This article considers the line between legal pre-pack arrangements and illegal phoenix activity for insolvent small-to-medium sized enterprises (SMEs).
- Pre-packs (also called pre-positioned arrangements) now have the limited support of insolvency practitioners (through the Australian Restructuring Insolvency & Turnaround Association) but this area of the law is hindered by a lack of targeted legislation.
- The case of ASIC v Franklin, (liquidator), in the matter of Walton Contructions Pty Ltd [2014] FCAFC 85 shows that a complex turnaround that involves a referral relationship between professional advisers and insolvency practitioners can be problematic.
There are a number of synonyms for phoenix activity, including asset stripping, phoenix trading, illegal phoenix, and phoenix arrangements. Unfortunately, there is no statutory definition for phoenix activity in the Corporations Act 2001 (Cth) and so the terminology varies in judgments and articles.
Phoenix activity occurs when:
- A company (we’ll call it ‘Oldco’) is insolvent; and then
- Oldco’s business is transferred for inadequate consideration to a related entity (which we will call ‘Newco’); but
- This transaction is detrimental to creditors, employees and other stakeholders; and
- This process may be repeated.
New research has sought to draw a distinction between what is a ‘legal’ phoenix and what is an ‘illegal’ phoenix. In their article ‘Phoenix Activity and the Liability of the Advisor’ (2014) 36 Sydney Law Review471, Helen Anderson and Linda Haller argue that a distinguishing characteristic of ‘illegal’ phoenix activity is the intention of the parties to defraud creditors.
So why do directors and their professional advisers engage in phoenix activity? Phoenix activity occurs for a broad range of reasons, such as directors mismanaging cash flow resulting in unpaid taxes, businesses having unprofitable or unsustainable business models, or an attempt at disaster recovery following a crisis.
