The Risks of Illegal Phoenix Activity

When a Director with ATO Debt Wants a “Fresh Start”

It is one of the most common conversations an insolvency adviser has. A director’s company is carrying a tax debt it cannot pay. The business itself still has customers, staff and goodwill. So the director asks the obvious question: “Can I just close this company, start a new one, and move the business across?”

The instinct is understandable. The execution is where directors get into serious trouble. Done the wrong way, moving a viable business into a new entity to shed an old company’s debts is illegal phoenix activity — and Australian regulators now have some of the toughest powers, and the sharpest appetite, they have ever had to pursue it.

This article explains where the line sits, why an ATO debt makes the scenario especially dangerous, what a director personally stands to lose, and the legitimate alternatives that achieve a genuine fresh start without crossing into criminal territory.

Legal restructure vs illegal phoenixing: it comes down to intent and process

It is worth being clear up front: restructuring a struggling business is not illegal. Businesses fail for legitimate reasons every day, and directors are entitled to wind up a failed company and try again through a new entity. Regulators accept this openly.

The activity becomes unlawful when a company deliberately transfers its assets — plant, equipment, stock, customer contracts, goodwill, the business name — to a new entity for less than market value (or nothing), in order to defeat creditors, and then leaves the old company to be liquidated with its debts unpaid. The classic fingerprint is a new company trading from the same premises, with the same staff, the same directors and often a near-identical name, but without the debt.

Two questions separate a lawful restructure from an illegal phoenix:

• Intent — is the purpose a fair outcome for creditors, or is it to put assets beyond their reach for the director’s benefit?
• Process — was the transfer done at proper value, at arm’s length, with documentation and valuations, and ideally under the supervision of a registered practitioner? Or was it a quiet, undocumented shuffle of assets on the eve of liquidation?

An unpaid ATO debt does not, by itself, make a restructure illegal. But it changes the risk profile dramatically, because the ATO is the creditor most likely to be defeated by the transfer — and it is the creditor with the most powerful recovery tools.

Why an ATO debt makes this scenario so dangerous

When the debt left behind is owed to the Tax Office, the director is not dealing with an ordinary trade creditor who may write the debt off. They are dealing with a regulator that can reach past the company and into the director’s own pocket. Three overlapping regimes create the exposure.

1. Creditor-defeating dispositions (the anti-phoenixing law)

Since February 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) has added a specific class of voidable transaction to the Corporations Act 2001 (Cth): the creditor-defeating disposition (section 588FDB).

Broadly, a transfer of company property is a creditor-defeating disposition if the consideration paid was less than the lesser of the property’s market value or the best price reasonably obtainable, and the transfer has the effect of preventing, hindering or significantly delaying that property becoming available to creditors in a winding up.

The features that make this provision so potent for the ATO and liquidators include:

• A liquidator does not have to prove the exact market value or the exact best price — only that, on the balance of probabilities, what was paid fell short of both. Australia’s first case on the provision (the Intellicomms decision) confirmed this relatively low evidentiary bar.
• If the company failed to keep adequate records of the transaction, it can be presumed the transfer was below value.
• A disposition can be voidable if the company was insolvent within 12 months of the transfer, or if external administration follows within 12 months — even where insolvency at the time is not separately proven.
• Liquidators and ASIC can act to claw the property (or its value) back, and courts can void the transaction and order compensation.

Directors, secretaries and — importantly — the advisers and intermediaries who design or facilitate the scheme can be pursued. Serious cases attract very large fines and, for directors and secretaries, up to 15 years’ imprisonment. In 2026, ASIC brought its first criminal charge for a creditor-defeating disposition, signalling that these are no longer theoretical powers.

2. Director Penalty Notices: personal liability for the tax itself

Even setting aside the phoenixing laws, the ATO can make a director personally liable for three categories of company tax debt through a Director Penalty Notice (DPN): PAYG withholding, GST, and the Superannuation Guarantee Charge (SGC). This liability arises automatically the moment the company misses the due date — the DPN is simply the ATO enforcing it.

The critical distinction is between the two types of notice:

• Non-lockdown (21-day) DPN — issued where the company did lodge its BAS/IAS or SGC statements on time but did not pay. The director has a 21-day window to remit the penalty by paying the debt, appointing a voluntary administrator, appointing a small business restructuring practitioner, or placing the company into liquidation.
• Lockdown DPN — issued where the company failed to lodge the relevant returns within three months of the due date (or failed to report SGC by the required date). Here the director is automatically and permanently liable. Crucially, appointing a liquidator, a voluntary administrator or a small business restructuring practitioner will not wipe out this personal liability.

This is where the phoenix strategy quietly backfires. A director who has stopped lodging “because we can’t pay anyway” typically converts a manageable problem into a lockdown liability. Winding up the old company then does nothing to erase the personal debt — it simply follows the director into the new venture, and can bankrupt them.

The ATO’s posture here has hardened sharply. It issued more than 84,500 DPNs in the 2024–25 financial year, a substantial jump on prior years, and has increased its use of Departure Prohibition Orders (which stop a director leaving the country) and referrals to credit reporting agencies. Once a director penalty crystallises, the ATO treats it like any other tax debt: it can retain your tax refunds, issue garnishee notices to your bank or employer, and pursue bankruptcy through the courts.

3. Breaches of directors’ duties and ASIC disqualification

Stripping assets to defeat creditors also breaches a director’s statutory and general-law duties. On top of the criminal and civil exposure, ASIC can disqualify a director — and it does not always need a court to do so. Under section 206F of the Corporations Act, ASIC can administratively disqualify a director who has been an officer of two or more companies that failed within a seven-year period. Cyclical failure — a string of companies collapsing and re-emerging — is exactly the pattern the multi-agency Phoenix Taskforce is built to detect.

What it looks like in practice: two cautionary cases

The risks above are not theoretical. Two Australian cases show how illegal phoenixing is identified by the courts and, increasingly, prosecuted as a crime.

Intellicomms: a textbook phoenix voided by the court

In the matter of Intellicomms Pty Ltd (in liquidation) [2022] VSC 228 was the first decision to apply the section 588FDB creditor-defeating disposition provisions — and the facts read like a checklist of phoenix warning signs.

On the very day Intellicomms was placed into creditors’ voluntary liquidation, it signed a sale agreement transferring its business assets — goodwill, intellectual property, business records, computer and office equipment, shares in overseas subsidiaries and even its telephone numbers — to a company called Tecnologie Fluenti. That buyer had been incorporated just 15 days earlier. Its sole director and shareholder was the sister of Intellicomms’ sole director, worked at Intellicomms as its finance and payroll administrator, and operated from the same registered office. In the lead-up, the Intellicomms director had commissioned three valuations that grew steadily more pessimistic, pushing the assessed value of the assets down. The transfer was timed to the last day for the company to comply with a creditor’s statutory demand.

The Victorian Supreme Court found the sale displayed every characteristic of a classic phoenix, that the price paid was less than both the market value and the best price reasonably obtainable, and that the director had deliberately planned the sequence to deprive creditors of the company’s assets. The judge described the conduct as “brazen and audacious,” and the transaction was voided. Importantly, the liquidators did not have to prove the exact market value — only that the price fell short of both statutory limbs.

The lesson: a close relationship between buyer and seller, the same premises and staff, a fire-sale price, engineered valuations and suspicious timing are exactly the fingerprints liquidators and regulators look for.

DeFrancesco: ASIC’s first criminal charge under the anti-phoenixing laws

In June 2026, ASIC announced its first-ever charges under the criminal creditor-defeating disposition regime — against Giuseppe DeFrancesco of NSW, in connection with the Camden restaurant Jasa Dining Pty Ltd (in liquidation), which had traded as The Italian Food Project.

ASIC alleges that between August 2023 and April 2024 he dishonestly used his position to redirect around $935,000 in proceeds from the sale of the restaurant business to himself, to the detriment of the company’s creditors — a breach of officers’ duties under section 184(2) of the Corporations Act that carries a maximum of 15 years’ imprisonment. He is separately alleged to have procured the company to redirect a further $96,793 in sale proceeds — said to be a creditor-defeating disposition made while the company was insolvent — contrary to section 588GAC(1), which carries up to 10 years. A third charge alleges he offered $50,000 to induce a witness to withhold truthful testimony.

The marker: the charges are allegations only — the matter remains before the courts and the accused is entitled to the presumption of innocence — but the criminal limbs of the 2020 reforms are now being used, and they reach not only registered directors but anyone, including employees and advisers, who procures or facilitates a creditor-defeating disposition.

How regulators catch it

The idea that a phoenix can quietly slip through is outdated. The ATO leads the Phoenix Taskforce, a multi-agency body (including ASIC) that uses sophisticated data-matching to flag red flags: directors linked to repeated failures, entities with the same address or phone number as a liquidated company, unpaid PAYG and super running alongside a new registration, and directors whose lifestyle does not match their reported income.

The Director Identification Number regime reinforces this. Every director now needs a unique, identity-verified number that follows them across every company they are involved in — which removes the old tactic of using fictitious names or “dummy directors” to obscure who is really behind a chain of failed entities. Public tip-offs, particularly from unpaid employees and subcontractors, feed the same intelligence.

Since the Taskforce was established, it has recovered well over a billion dollars in liabilities and returned hundreds of millions to the community — and it explicitly targets the pre-insolvency advisers who market these schemes.

The current pressure point: Payday Super and the post-EOFY enforcement cycle

Timing matters right now. From 1 July 2026, Payday Super requires employers to pay superannuation at the same time as wages (with the fund receiving contributions within days), rather than banking on the old quarterly cycle. For a business that has quietly used the quarterly super deadline as an informal line of credit, that float has disappeared — and historical super arrears convert into SGC exposure faster than before.

Combined with the ATO’s post-end-of-financial-year enforcement cycle, and the fact that the General Interest Charge on tax debts is no longer tax-deductible from 1 July 2025, a marginal business can tip from “struggling” to “insolvent” quickly. Directors who wait for the enforcement letters to arrive before seeking advice usually find their good options have already expired.

The legitimate alternatives: a genuine fresh start, done lawfully

The good news is that nearly everything a director hopes to achieve through a phoenix can usually be achieved lawfully — but only if they act early, while the company is still solvent or borderline, and before director penalties become non-remittable. The main pathways:

• Small Business Restructuring (SBR). Under Part 5.3B of the Corporations Act, an eligible company with total liabilities of $1 million or less (including tax debts) can appoint a small business restructuring practitioner, propose a plan to creditors to pay a portion of debts over time, and — critically — the director stays in control of the business throughout. For many owner-operated companies with ATO debt, this is the tool that actually preserves the business. But note: it must be accessed while eligible; once penalties lock down or liabilities exceed the threshold, the door closes.
• Safe harbour (section 588GA). If a director starts developing one or more courses of action reasonably likely to lead to a better outcome than immediate liquidation, they can be protected from personal liability for insolvent trading while they pursue a genuine turnaround. Importantly, safe harbour does not protect a creditor-defeating disposition — it is a shield for good-faith restructuring, not asset-stripping.
• Voluntary administration and a Deed of Company Arrangement. These formal processes, run by a registered practitioner, can restructure or compromise debts, and can facilitate a legitimate sale of the business — including to a related party — provided it is at proper value and under the practitioner’s supervision. Transfers made by an administrator or liquidator, or under a court-approved arrangement, sit outside the creditor-defeating disposition rules.
• A properly valued, arm’s-length sale. If the business genuinely is to move to a new entity, the transfer must be at independently assessed market value, fully documented, with the sale proceeds available to the old company’s creditors. Paying “fair value” is the single most important factor distinguishing a lawful sale from a voidable one.
• A payment arrangement with the ATO. In many cases the ATO will negotiate a payment plan. It will not remit a director penalty once a 21-day DPN is on foot unless the debt is paid in full, but engaging early — and continuing to lodge on time even when you can’t pay — keeps a director out of lockdown territory and preserves every other option.

Practical takeaways for directors

• Keep lodging, even if you can’t pay. Lodging BAS, IAS and SGC statements on time is the single most powerful protection against a lockdown DPN. Non-lodgement is what turns a solvable problem into personal liability with no escape.
• Never transfer assets below value. Any move of company property to a related entity should be independently valued, documented and priced at market — and ideally run through a registered practitioner.
• Be wary of “pre-insolvency advisers” promising a debt-free continuation. If the pitch is essentially “we’ll help you keep trading without the debts,” it may be an invitation to break the law — and the adviser can be prosecuted alongside you.
• Act early. Almost every legitimate option depends on moving while the company is still solvent or borderline. Waiting for the DPN, the winding-up application or the liquidator removes them one by one.
• Get advice from a registered liquidator or restructuring practitioner — not just whoever offers the outcome you want to hear.

The bottom line

Wanting a fresh start when a company is buried under an ATO debt is not wrong. Achieving it by quietly shifting the business into a new entity and leaving the tax debt behind is illegal phoenix activity — and the consequences are no longer abstract. A director in that position faces personal liability for the tax through a DPN that liquidation won’t cure, clawback of the transferred assets, potential disqualification, bankruptcy, departure prohibition, and — in serious cases — criminal prosecution carrying up to 15 years’ imprisonment.

The lawful pathways — small business restructuring, safe harbour, voluntary administration, and properly valued sales — exist precisely to give viable businesses a second life without harming creditors. The difference between a smart restructure and a career-ending mistake is almost always acting early and doing it at proper value, with proper advice.

This article is general information only and does not constitute legal or financial advice. Illegal phoenix activity, the Director Penalty Notice regime and restructuring options turn heavily on the specific facts, and the law and ATO practice change frequently. Any director whose company has ATO debt should obtain advice from a registered liquidator, small business restructuring practitioner or qualified insolvency lawyer before taking any step.