Defining and Profiling Phoenix Activity

Abstract

Phoenix activity occurs where the business of a failed company is transferred to a second (typically newly incorporated) company and the second company’s controllers are the same as the first company’s controllers. Phoenix activity can be legal as well as illegal. Phoenix activity has become a significant concern for governments because of the number of individuals promoting illegal phoenix activity, the significant loss of tax revenue it causes, and the recognition of the potentially devastating impact it has on creditors and employees. A key problem faced by regulators is the difficulty associated with identifying whether particular phoenix activity is illegal or not. This report (which forms part of a larger research project) profiles the characteristics of both legal and illegal phoenix activity to assist regulators in formulating education, detection, and enforcement strategies. The report examines the various historical attempts to define phoenix activity and then identifies the following five categories of phoenix activity and provides examples of each: (1) the legal phoenix or business rescue; (2) the problematic phoenix; (3) illegal type 1 phoenix: intention to avoid debts formed as company starts to fail; (4) illegal type 2 phoenix: phoenix as a business model; and (5) complex illegal phoenix activity.The report also examines the role of professional advisors in facilitating illegal phoenix activity, the victims of illegal phoenix activity (including governments, unsecured trade creditors and employees) and two industries (the building and construction industry and the financial services industry) where illegal phoenix activity has been identified as a particular concern.