Legal Phoenix, or Illegal Phoenixing? The Line Your Client Might Not See

When a company can’t pay its debts, some directors sell the business and its assets into a new company, then place the old company into liquidation. Done properly, that’s a lawful “legal phoenix,” a legitimate and fairly common restructuring tool. Done poorly, it’s illegal phoenixing, and it can expose the director, the purchaser, and their advisers to personal liability.

As the first point of contact for many directors, accountants and lawyers are often the ones best placed to spot the difference, ideally before a transaction is signed, not after a liquidator starts asking questions.

It’s not the restart that’s illegal

Businesses fail and restart for entirely legitimate reasons, and Australia’s insolvency framework is built to allow that. What separates a legal phoenix from illegal phoenixing isn’t the fact that a new company continues the trade. It’s whether the old company’s creditors were treated fairly along the way: whether assets were sold for proper value, whether the sale proceeds were actually available to the liquidator, and whether the whole transaction was transparent rather than designed to leave creditors with nothing.

ASIC and the ATO run a joint Phoenix Taskforce specifically targeting arrangements where a company is deliberately liquidated to avoid paying creditors, employees and tax, with a successor company continuing the same business in its place.

The legal test: a “creditor-defeating disposition”

The line between the two isn’t a feeling, it’s a defined legal concept. A transaction crosses into illegal phoenixing when it meets the test for a creditor-defeating disposition (CDD): broadly, a disposition of company property for less than its market value, or less than the best price reasonably obtainable, made with the effect of preventing, hindering or significantly delaying creditors’ access to that property in a liquidation.

A CDD doesn’t require proof the director set out to defraud anyone. If the effect of the disposition is to leave creditors worse off than they should have been, that’s enough to engage the regime. Since the 2020 illegal phoenixing reforms, a CDD carries civil and, in serious cases, criminal consequences for the director, and can extend to anyone who procured, incited, induced or assisted the disposition, which is why advisers who help structure a sale need to satisfy themselves the four checkpoints below are genuinely met, not just documented as if they were.

Director ID: closing the “serial phoenix” loophole

One of the practical obstacles regulators used to face was simple: a director could dissolve one company and resurface as a director of the next under a slightly different name or identity, making repeat phoenix activity hard to trace. The Director Identification Number (DIN) regime closes that gap. Every eligible director must now hold a unique, verified DIN that stays with them for life, regardless of how many companies they’re a director of or how many times they resign and re-appoint.

For advisers, this matters in two ways. First, it means a director’s history is now far more traceable across entities, so a pattern of repeated failed companies is easier for ASIC, the ATO and liquidators to connect than it once was. Second, failing to apply for a DIN when required, or providing false identity information to obtain one, is itself a separate offence, independent of anything that happens with the company later.

Four checkpoints