Who Am I In Business With? Contracts, Novation and Phoenixing

What happens if the business you are in a contract with can’t continue?

For most business relationships, this means the contract itself ends once one party no longer exists; a company that is deregistered through bankruptcy or winding up is no longer a legal entity, so any obligations a business may have had to the now defunct company no longer exist.

In some cases, however, businesses seek to novate their agreements.  Novation transfers the rights and obligations of a party to a third party.  Most often, this occurs where a business is sold, inclusive of existing contracts, or where there are large corporate takeovers of other companies.  In both of those cases, the party who “ceases to exist” is looking to profit from the existence of the contract by selling it to another party who wants to carry on the same business.

But what if you are company A, doing business with company B, and B novates your contract to company C… however company C looks, feels and acts just like company B?

What happens if company B and company C don’t just carry on the same business, they are run by the same people, they have the same management team, and they specifically tell you that everything is the same as it used to be?

It’s a question which is being asked by the ABC this evening, who looks at the whether this particular example is really a form of illegal phoenixing.

The Australian Securities and Investments Commission defines Phoenix Activity as:

This illegal practice usually happens when company directors transfer the assets of an existing company to a new company without paying true or market value, leaving debts with the old company. Once the assets have been transferred, the old company is placed in liquidation. When the liquidator is appointed, there are no assets to sell so creditors cannot be paid.

Once the assets are transferred to a new company, the directors continue to operate the business. This gives the new business an unfair advantage when competing for work, because they carry less debt and have lower operating costs.

Illegal phoenix activity hurts sub-contractors, creditors and employees as they are left unpaid and out of pocket. It indirectly hurts the broader community because the company avoids paying tax and the government often has to subsidise outstanding employee entitlements.

Of course, not all phoenixing is illegal, and novated contracts are certainly not, by themselves, either illegal or particularly dangerous, however if you have any concerns or questions about your own novated contracts, and question whether illegal phoenixing has occured, speak to us about your options and what you can do next.