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Catching Pre-Insolvency Advisors: The Hidden Culprits of Illegal Phoenix Activity

The Australian Securities and Investments Commission and Australian Taxation Office are becoming increasingly concerned about the role that pre-insolvency advisors play in promoting illegal phoenix activity. Illegal phoenix activity occurs where the directors of a company liquidate or abandon the company with the intention of avoiding its obligations and then continue the same or a similar business via a new or related company. Pre-insolvency advisors who counsel directors to engage in illegal phoenix activity are subject to liability under a range of corporate, labour and taxation laws, as well as licensing and professional conduct rules. These advisors may be either qualified professionals, such as lawyers and accountants, or unqualified “turnaround specialists”. This article explains how the existing laws and rules apply to advisors and also suggests a number of legislative and administrative reforms aimed at curtailing their participation in illegal phoenix activity, with a particular focus on early detection and prevention mechanisms.