The Corporation’s Amendment (Similar Names) Bill 2012 has been drafted by the Government to curb phoenix activity in Australia.
Phoenix activity includes a director of an indebted company intentionally transferring assets at a price below market value to another company that they are also the director of. The indebted company is then put into liquidation while the director keeps trading with the indebted company’s assets without any existing liability.
The Corporations Amendment (Similar Names) Bill 2012 is trying to apply personal liability, both jointly and individually, to the directors of failed companies by making them personally liable for all debts incurred while they were directing a company with a similar name to that of the company pre-liquidation.
The pre-liquidation name refers to any name that the company used in the 12 months before the winding up of that company. This includes its current name or any name it used, including business names.
The Bill will mean the director will be liable for debts incurred by phoenix companies within five years of winding up the failed company.
The director may avoid liability if they obtain an order from the court or be exempt from the liquidator of that failed company.
That order or exemption may be obtained if:
- There were reasonable grounds to suspect the company was solvent when the debts were incurred;
- The extent to which the assets, staff, and premises of the company that failed are now assets, staff and premises of the new company;
- If the director has created misleading impressions that the failed company and the new company are the same entity.
The director will only be exempted by an order of the courts if the courts determine that the director acted fairly and honestly and if the courts consider it fair that they director not be liable for the debts of the company.
A director may also be exempt if they direct several companies with similar names. This is only the case if the similarly named company was in operation one year before the failed company went under.
Some believe that this bill does not provide a satisfactory solution to phoenix activity as it only addresses situations when two companies have a similar name. They believe that to get away with phoenix activity, one must simply start a new company that does not share a similar name to the failed company.