Phoenix Transactions Video

Hello and welcome to the Insolvency Experts, I’m Steven Kugel.

Today we are going to discuss the concept of Phoenix Transactions.

Phoenix transactions are highly illegal and the Australian Securities and Investments commission and all liquidators are very concerned about these transaction.

Now rather than trying to give you a definition of a Phoenix Transaction, it may be clearer to paint the picture of how a Phoenix Transaction would appear.

Let’s say there is a company known as John Smith Pty Ltd and that company is in severe financial distress with $20,000 of assets and $200,000 liabilities.

Clearly the company is insolvent.

Understanding there is an issue and having some concept of Insolvent Trading, the director appreciates he cannot keep trading through his company as it will be taken away from him sooner rather than later.

So the director sets up something that looks virtually identical to John Smith Pty Ltd — in this case, he sets up a new vehicle called John Smith (Aust) Pty Ltd and he transfers;

• The phone lines
• The employees
• The stock
• The assets
• The vehicles
• The receivables

In fact he transfers all the assets of the old insolvent company to the new company

BUT the director does not transfer the debts payable to the creditors.

From the outside it looks exactly like the old company but what the director has done is to move the assets of the old company that should have been available to the creditors into another vehicle in which those creditors have no legal recourse.

The Legal Issue of Phoenix Transactions

So the legal issue in a Phoenix transaction is that the director has transferred the assets of the old company in order to defeat the claims of the creditors.

Now in this circumstance, creditors need to do one of a couple of things.

The first is to place the company into Liquidation. If this can be achieved, a liquidator with the support of the creditors can take action against the new company and its director for the recovery of the assets or the recovery of the correct value of the assets transferred.

Often times however, creditors will not be willing or able to provide monetary support to the liquidator to commence legal action to counter the behavior of the director so in these cases, the Liquidator may apply to ASIC for funding under the Assetless Administration Fund — a fund designed by ASIC to enable no fund liquidations to pursue serious behaviour including Phoenix Transactions.

Again, Phoenix Transactions are highly illegal and looked upon very seriously by ASIC.