June 21, 2020

The Rise of the Phoenix

"He who was but now the sire comes forth from the pyre the son and successor; Between life and life lay but that brief space wherein the pyre burned."    The Phoenix by Roman poet Claudian, 4 AD 

According to legend heard at Heliopolis in Egypt, there exists a fabulous bird called the phoenix, like an eagle, with feathers of red and gold. When this bird's life draws to a close he builds a funeral pyre, commits himself to the flames and dies. Out of self-immolation a new phoenix emerges on the fiery altar. 

In modern commerce the phoenix bird is iconic, inspiring businesses burned by debts to rise from the ashes of destruction and continue trading under a different name, leaving their creditors behind.

Curbing the Flight of the Phoenix describes how phoenix moves are used by companies in insolvency to divest liabilities:

"Like the mythical bird that dies and then resurrects, phoenixing is the deliberate liquidation of a company to avoid paying tax, creditors or employees and then the ‘resurrection’ of the business through a different entity. It is illegal. The negative impact of insolvency is magnified by phoenixing, which enables a company that owes money to creditors and employees to restart without paying its debts.

Phoenixing is illegal, but that's not much of a deterrent, and it's become a booming business for delinquent company directors and their facilitators, insolvency liquidators, lawyers and judges.

Nightcap on Minjungbal

As the Australian government was legislating new offences to deter illegal phoenixing, a case before Qld Federal Court during 2017-19 challenged alleged phoenixing of the company Wollumbin Horizons Pty Ltd, slated for receivership by Vincents' liquidator Steven Staatz.

The company owns property that is now advertised by Nightcap Realty and other promotors as part of a proposed land-share development run by Sovereignty Activists. 

The venture was called Bhula Bhula Village Community in 2015-2017,  and is now renamed "Nightcap on Minjungbal". It is run by an anonymous Sovereignty Activist, "Mr X," in partnership with landowner Peter van Lieshout, brother of John van Lieshout, Queensland's top billionaire.

Closed Sphinx Rock Cafe
Nightcap Realty is marketing "Native Title" to private properties without development approval,

The matter involves 21 investors who, in 2014-2016, paid more than $2 million to the Trust Account of Mullumbimby lawyer Wroth Wall, as intended co-owners of property in the venture, with total failure by the Sovereignty Activists to fulfil their marketing promises.

The economic impact of illegal phoenix activity 

Phoenixing is illegal, but that's not much of a deterrent, and it's become a booming business for delinquent company directors and their facilitators, insolvency liquidators and legal professionals.

ARITA slams phoenix moves:

Australian Restructuring Insolvency & Turnaround Association (ARITA) chief executive John Winter told Accountants Daily:

“These unregulated and almost-always unqualified advisers promote their wares to often unsuspecting people who are in financial distress, and what they offer them is generally illegal solutions...

“The message needs to be sent to these so-called advisers and the directors who use them that they will be found out and prosecuted.. They are a scourge on the economy, ripping off creditors, employees and taking advantage of people at their weakest moments.”  
"Phoenix companies arise from the ‘ashes’ of a collapse of a commercial entity, leaving behind a trail of avoided outstanding payments to tax authorities, creditors, businesses, customers and employees." The Economic Impacts of Potential Illegal Phoenix Activity

An Australian Inter-Agency Phoenix Taskforce made up of 29 government agencies aims to reduce the impact of illegal phoenix activity. 

Thirteen Commonwealth government agencies, including ASIC, the ATO and Fair Work Ombudsman have powers to investigate and prosecute "phoenix activity" or "phoenixing". But usually they don't.

"The Federal Court has commenced public examinations on entities connected to a dodgy pre-insolvency adviser, in a move welcomed as shining the light on illegal operators.

"ATO deputy commissioner Will Day has confirmed that more than 45 service providers, clients, employees, and alleged ‘dummy directors’ of phoenix companies connected to pre-insolvency adviser Philip Whiteman will be examined in the Federal Court on the grounds of suspected promotion and facilitation of phoenix activities and tax schemes." 

In July 2018, the Phoenix Taskforce published a report, The Economic Impacts of Potential Illegal Phoenix Activity, that defines illegal phoenix activity as the deliberate and systematic liquidation of a corporate trading entity which occurs with the intention to continue the operation and profit taking of the business through other trading entities, while avoiding liabilities: 

According to the report, the annual economic impact of illegal phoenix activity is over $5 billion a year. 

Until now very little has curbed the rise of the phoenix as companies in default increasingly use liquidation as a means to divest liabilities, but that's changing.

"Regulators are aware of the problem. ASIC announced in September it will conduct surveillance of 1,400 target companies and approximately 2,500 individuals... Concurrently, the ATO announced it will investigate 2,000 property developers..." Curbing the Flight of the Phoenix

Regarding the anticipated phoenix move involving the property at 3222 Kyogle Rd, Mt Burrell, in 2017, company director, Mr X,  after driving purchase money creditors off the land without restitution, then pushed for liquidation of the company owning the property that would potentially divest company liability to creditors of over $2 million, while, under a different name, continuing the same business of selling dwelling sites without development approval on property where multiple occupancy is currently not permitted. 

Australian courts have absolute authority to stop illegal phoenix activity and to impose penalties on delinquent directors and complicit liquidators. But, usually they don't, as the self-represented defendants discovered in 2019, when QLD Federal Court Judge, Derrington J, refused to hear evidence of alleged fraud, and slapped a suppression order on a class action requesting justice. 

In May, 2020, an application to appeal from the 2019 decision by Derrington J to permit the anticipated phoenix move, was summarily rejected in Qld Federal Court of Appeal, without hearing evidence.

Justice denied, Qld Federal Court of Appeal therefore allowed the expected phoenix activity to proceed.

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