Evaluate nature of phoenix activity, Business Law and Ethics

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Q. Evaluate nature of phoenix activity?

The literature on phoenix activity and the stakeholders consulted in this project emphasised that phoenix activity has evolved significantly over the past decade. Multiple stakeholders emphasised that phoenix activity is not confined to the building and construction industry or the lower end of the SME sector as it perhaps once was. Stakeholders noted the rise of phoenix activity in the cleaning and private security industries, with one stakeholder describing phoenixing in the private security industry as being at endemic proportions.

Multiple stakeholders observed that it is often suspected that financial advisers, lawyers and insolvency practitioners are involved in some incidents of phoenix activity. This issue was raised in the Parliamentary Joint Committee on Corporations and Financial Services Stocktake of Corporate Insolvency Laws. Phoenix activity has also evolved in terms of the forms it can take. In the early 1990s the most common forms of phoenix activity were where a company would incur debt in the form of employee entitlements, to creditors and for outstanding tax. Consequently, the business would go into liquidation or administration. The directors of the company would then form a new entity, often using some or all of the assets of the former company and often the same business name. This is commonly referred to as 'asset stripping'.

Recently, a more common arrangement is for a group of companies to be formed, where each primary business function is operated through a separate entity. One of the entities will supply labour to the entire group and will have relatively few or no assets. The labour entity withholds taxes and incurs debts and is declared insolvent without affecting the assets held elsewhere in the group. A new labour supply entity will be created and workers are transferred to this entity with little or no interruption to the day-to-day operations of the business.


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