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Illegal Phoenix Activity: Quantifying Its Incidence and Cost

Phoenix activity centres on the idea of a new company arising from the ashes of its failed predecessor. Typically, the individuals in control of the failed company transfer the business to the new company while its debts remain the responsibility of the failed company. The activity becomes illegal where the intention of the company’s controllers is to use the company’s failure as a device to avoid paying the failed company’s creditors (who may include the company’s employees and revenue authorities) that which they otherwise would have received had the company’s assets been properly dealt with. Illegal phoenix activity has become a matter of increasing concern in recent years. Many parties are interested in understanding the size of the problem, how much it costs the economy, and how well current enforcement mechanisms work. These are important questions because they influence the allocation of government resources and the process of law reform. To answer the quantification questions, the authors gathered all the available data on the incidence and cost of illegal phoenix activity, as well as the enforcement of the various laws that can be utilised to combat it. However, despite the large amounts of information obtained, it was not possible to provide a definitive answer to the quantification questions. Moreover, accurate quantification is highly problematic. This article, which is based on a much longer research report, presents the authors' key findings and explores the difficulties with quantification.