The Government has drafted The Corporation’s Amendment (Similar Names) Bill 2012 to curb phoenix activity in Australia. Phoenix activity involves the intentional transfer of assets by a director of an indebted company at a price below market value to a new company, of which they are also a director. The indebted company is then placed into liquidation and the director continues trading with the company’s assets of the indebted company without any existing liability.
The Bill seeks to apply personal liability, jointly and individually, to directors of failed companies by making the directors personally liable for debts incurred while they were a director of a company which has a similar name to the pre-liquidation name of the failed company.
A pre-liquidation name is any name in which the company was known in the year leading up to the winding up of the failed company. This includes its actual name or any name used to carry on its business, including business names.
The Bill will extend a director’s liability for debts incurred by phoenix companies within five years of the commencement of winding up of the failed company. A director’s liability may be avoided by obtaining an order from the Court or an exemption from the Liquidator of the failed company.
Questions have been raised regarding situations where a person is the director of a number of companies with similar names. Exemptions are available to directors in this situation. The exemptions provide that where the similarly named company was carrying on business in the year prior to the failure of the failed company, the director will not be held liable. It has been raised that this legislation amendment does not adequately provide a solution to phoenix activity.
Some believe the Bill only addresses a phoenix company with a similar name to that of a company in liquidation. A person who wishes to engage in phoenix activity may simply circumvent the Bill by starting a new company, which does not have the same or similar name.