Phoenixing Firms Mis-Selling Products and Services To The Public

The term phoenix activity (or phoenixing, as it is often known) lacks a standard meaning. It is currently a very broad term that encompasses several unscrupulous behaviors by business owners. Also, no other law on the books provides a definition for it. Looking at the phrase as a whole, phoenixing describes the process of rebirthing a firm by recycling its assets into a new company that operates similarly to the original.

When a company is having financial difficulties, innocent phoenixing occurs when the owners want to legally start again. This often results in poor financial record-keeping and the mishandling of cash flow. When an operator's competence and/or line of work encourages them to engage in phoenix behavior, this is an occupational hazard. Repeat offenders, or careerist offenders, are those who take advantage of the system by repeatedly committing similar crimes for financial benefit.

The term legal phoenix, which is synonymous with business rescue, is used when the company's directors do not intend to deceive its creditors and when it is in everyone's and the economy's best interest to save the firm from liquidation, otherwise known as Chapter 7. The problematic phoenix situation, although technically lawful, but the total outcome is not helpful to creditors or society at large occurs when:

●     a corporation that started out lawfully but is now in financial trouble due to unethical business practices or unforeseeable events. This leads to the formation of fraudulent intent against creditors at or just before the moment of company collapse;

●     Phoenixing is illegal since it involves a firm that was formed and structured for the primary purpose of participating in phoenix activities for the purpose of the owners' personal gain.

●     Phoenix is a business model that goes along with and is done by the same people who commit more serious crimes in the same way.

When considering these many definitions, the issue at hand shifts from ‘what is phoenix activity?’ to ‘which phoenix activity is legal?’ or ‘which phoenix action should be illegal?’

In illegal phoenix activity, assets are transferred to a new business and the previous firm is dissolved on purpose to avoid paying creditors. Directors engaging in phoenix activity may be pursued by the following because of the possibility for legal violations:

●     Liquidators have the right to sue directors and their colleagues for creditor-defeating dispositions, insolvent trading, inappropriate director-related activities, and other violations of law.

●     It may also order the return of any assets that were given up to avoid paying off creditors.

●     Creditors of a phoenix firm frequently claim that the liquidator does not conduct thorough investigations or take enforcement action because he or she lacks the resources to do so.

There has always been a subset of behavior described as an abuse of the corporate form, which includes illegal phoenix activities. Trading fraud, or insider trading (https://en.wikipedia.org/wiki/Insider_trading), is a classic example of unethical business practices that may damage a company's standing with its current suppliers and creditors. The company's management or board of directors then knowingly continues to run up debt before ultimately dissolving the business without first paying off any of the debt.

Where exactly does phoenix activity go wrong?

While the term Phoenixing is often used to refer to the process of transferring assets to a new company, it may also refer to the practice of deliberately squandering such assets in order to force the original company into bankruptcy. These assets or roles with the new company might be taken on by members of their family or other close associates.

There are cases of extreme self-interest when the party cares little or nothing about how their actions affect others. Companies engaged in Phoenixing are typical examples of the issue of a self-centered culture. They go out of business overnight, leaving people unpaid, then pop up tomorrow and have a new name, conning customers into believing they’re doing business with a new and reputable firm.

Illegal phoenix activity is harmful because it prevents legitimate creditors from getting paid what they are owed. The damage to the economy as a whole, consequences to scammed people and companies, and a decline in faith that debts would be paid are potentially far more severe. This hurts market efficiency and provides phoenix enterprises an unfair edge over its rivals. You can't compete with a company that can just reinvent itself if it becomes behind on payments or the phoenix effect.

What, therefore, is the motivation for directors to partake in or enable phoenix activity?

The main justification is to avoid paying their bills and taxes. However, it is interesting to explore the following factors when focusing on the directors' own psychological motivations:

●     It might be a stopgap measure until the underlying problem is fixed, such as when a business loses a major client or the owner becomes ill.

●     Potentially, board members are using funds to support substance abuse, excessive gambling, or alcoholism.

●     Some sectors may even include phoenix activity into their bids as a regular reaction to bankruptcy brought on by common problems like inept management, a large project with insufficient operating capital, and/or shoddy bookkeeping.

●     Although there is no reliable body of factual data supporting asset stripping, it is common knowledge that certain professionals, including accountants, former liquidators, and attorneys, advocate for it. Phoenix operators is a term used to describe these people.

Creditor-defeating dispositions are a result of illicit phoenix activity.

Before an insolvent liquidation (https://www.gov.uk/government/publications/liquidation-and-insolvency/liquidation-and-inso), a creditor-defeating disposal happens when a corporation sells or otherwise disposes of assets for less than their fair market worth. This step often takes place during a company's dissolution, and it might be a part of a larger unlawful phoenixing scheme. This prevents, hinders, or considerably delays the availability of the company's assets to satisfy the claims of creditors.

Creditors and liquidators will be empowered to pursue remedies, such as recovering the property, receiving compensation, and pursuing criminal and civil fines against persons and legal entities that violate the aforementioned obligations. These modifications serve to discourage would-be phoenix organizers and provide liquidators an additional tool to seize assets.