Phoenix companies under fire

Ian Bisson of Hynes Lawyers assesses ASIC's new Assetless Administration Fund

NOT every new corporate venture succeeds. So it is sometimes necessary to utilise the protection afforded under the Corporations Law. When a company is liquidated any interested party, including the former directors, can pick over the carcass for any valuable remains - which by then are selling at bargain basement prices - and start up a business all over again - absolved from debt.

This is known as a phoenix company - resurrected from the ashes of a 'burnt down' venture. Not every corporate failure stems from an honest operator falling on tough times. Deliberately syphoning cash out of a business and racking up debts with no intention of paying them can bring a company crashing down even quicker.

Further, unintentional protection is afforded to the directors of such companies in the form of the liquidator. A liquidator is not obliged to incur any expenses other than those necessary to comply with the minimum statutory requirements, unless the company in liquidation has property to fund it. With few assets or receivables the liquidator will quickly run out of cash to conduct the investigation into the company and the misconduct of directors in the time leading up to the liquidation may go undiscovered or without sanction. On top of getting rid of all their debts you can see the appeal to the unscrupulous operator. This has long been a problem for government regulators and insolvency practitioners alike. Although ASIC does have the power to investigate such instances, many factors, mainly resource based, work against them in conducting investigations.

In June, 2004, a parliamentary committee recommended the creation of a scheme to fund liquidators so they could investigate phoenix company operations. As a result we now have ASIC's Assetless Administration Fund, designed to fund investigation into a company where it appears that enforcement action may result.

It is hoped the fund will achieve more rigorous investigation and reporting resulting in better corporate conduct generally, better returns to creditors and to reduce the scope for phoenix activity. There will be some problems with the fund too: it only assists the prosecution of directors with no funding to seek recovery of assets. The report prepared by the liquidator is used as the basis of the prosecution and made available to the director being prosecuted. Liquidators doing the right thing can end up in a lengthy prosecution process as a witness. While ASIC provides the funding, they pay that money into the liquidation bank account, which means for the funding to be available the creditors have to approve the remuneration.