Phoenix company wound up following ‘fictitious joint venture’

In insolvency and restructuring there is a special emphasis placed upon behaviour known as “phoenix activity”.  Phoenix activity is where a new company is created to continue the business of an existing company. Typically, this will involve a company entering into a transaction with another related entity for the sale of its assets. This allows business to continue, however the new company will not have any of the liabilities that the original business had such as obligations to creditors, the ATO or employees.

While there are several legitimate and legal forms of restructuring or reorganising a company, it is particularly unwise to simply enter into such a scheme without first checking its legality. The consequences of doing so are very severe including: liability for a breach of directors’ duties, ASIC penalties, penalties under the Director Penalty Regime of the Taxation Administration Act 1953, and breaches of the Fair Work Act 2009 if the scheme involves the avoidance of employee entitlements.

The recent case of Yeo v Alpha Racking Pty Ltd [2019] FCA 1338 provides a guideline of circumstances that indicate phoenix activity is occurring. The case concerned an application bought by the liquidators of a company known as Alpha Storage. The application sought the winding up of a company known as Alpha Racking as well as the appointment of the plaintiff liquidators as its provisional liquidators. This application was bought due to a suspicion that the assets of Alpha Storage were wrongly being transferred to Alpha Racking for the purpose of defeating creditors.

After reviewing the evidence presented by the liquidators O’Bryan J concluded that a strong case that the directors of Alpha Storage were engaged in a plan to strip the assets of Alpha Storage and transfer them to Alpha Racking had been established. His Honour held at [34] that the phoenixing activity included:

(a) the creation of a false joint venture agreement between the companies;

(b) attempts to have customers pay Alpha Racking — and not Alpha Storage — money they owe to Alpha Storage;

(c) the creation of what appear to be false financial records, including financial statements, for Alpha Racking and Alpha Storage;

(d) the transfer of staff from Alpha Storage to Alpha Racking; and

(e) the setting up of a new financial accounting package for Alpha Racking and the transfer to it of “open” purchase orders that are the property of Alpha Storage.

At [35] his Honour explained how the evidence of the case indicated phoenix activity was taking place:

First, Alpha Storage has issued invoices to third parties, showing that it was a trading entity and not a “labour hire” firm.

Second, security interests have been registered in the name of Alpha Storage on the Personal Property Securities Register and finance agreements exist between Alpha Storage and various financiers (ANZ Bank, Macquarie Leasing Pty Limited, Toshiba, PCP Finance), again showing that Alpha Storage was conducting a trading business.

Third, a “LinkedIn” page gives a description of the business activities of Alpha Storage and there is no reference to a joint venture.

Fourth, the debt owed to the Commissioner of Taxation includes a significant liability for GST which indicates that Alpha Storage operated a significantly sized business.

Fifth, there is no reference to a joint venture in any of the documents provided to or obtained by the liquidators, including the financial accounts and taxation documents of Alpha Storage.

Sixth, the partner from BDO Melbourne who was responsible for preparing Alpha Storage’s accounts and tax returns confirmed that no mention was ever made of a joint venture arrangement and that Alpha Storage traded in its own right.

Seventh, the documents evidencing the lease for the Dandenong South and Brisbane premises are in the name of Alpha Storage. These documents post-date the purported joint venture agreement. Further, the leasing agent of the Dandenong South premises was unaware of any joint venture.

Based on the above findings, his Honour agreed that a strong prima facie case of serious misconduct and potential fraud in the conduct of Alpha Racking’s affairs had been established. The application was therefore granted.

In addition to the Yeo case, the ATO and ASIC also include information on the warning signs of phoenix activity including:

  • the company fails and cannot pay its debts
  • the company changes its name to its Australian Company Number (ACN) and a new company is registered, often with a similar name to the old company
  • the directors or former directors transfer the assets from the old company to the new one for less than market value
  • the new company operates the same or similar business as the old company, sometimes from the same premises, using the same assets
  • the new company often uses the same bank account, advertising material, websites or contacts details as the old company
  • the people involved in managing the old company control the new company, either as the directors or controllers.

 

Wiebke Herrmann

Wiebke Herrmann is a Director at James Conomos Lawyers where she practices in the areas of insolvency, bankruptcy and commercial litigation. If you or your business needs assistance navigating a legal dispute, please do not hesitate to contact her. 

3004 8214 |    |  wiebke@jcl.com.au