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Company Law - Essay Example

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Company Law Name: Institution: COMPANY LAW Fraudulent phoenix activity refers to the evasion of a company’s liabilities and tax. Such liabilities would include employee entitlements and occur via systematic, deliberate, and cyclic liquidation of corporate trading entities…
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Company Law
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Company Law

Download file to see previous pages... Limited liability possessed by companies shield shareholders and directors from any costs related to the company’s failure. Genuine failure of business, which occurs even after a diligent management of a business, followed by a subsequent change of corporate entity, can be viewed as a legitimate utilization of the corporate form. Fraudulent phoenix activity, in its basic form, involves an entity carrying out its business via accumulation of debt with no intention of re-servicing the debt for wealth creation and giving a boost to the business’ cash flow (Hannigan, 2012). The corporate entity then liquidates in order to avoid being made to repay their debts. However, the business exists under a different name but is controlled by the same group of individuals. However, most fraudulent phoenix arrangements are more sophisticated than this. A typical arrangement of this nature is structured as follows: a closely held group is put up, consisting of various entities such as one, which plays the role of human resource management. The entity charged with hiring labor normally has one director who does not serve as the group’s ultimate controller. The entity has very few assets and minimal share capital. When the labor hire entity cannot fulfill its liabilities, it is put into liquidation or administration by the ATO. Another labor hire entity is put up, with the labor moved to work under the new entity, with the process being repeated with limited or no disruptions to daily operations. The financial benefits reaped from unpaid liabilities are then shared out among the whole group. An example of this involves a labor hire business with an annual turnover of thirty million dollars and negligible assets, which is made up of fragmented operations through fifty-three related companies. These companies lodged accurate BA statements but did not remit the amounts required under the PAYG system. The director of the single company then proceeded to liquidate all of the other companies in a matter of one week, moving his two thousand seven hundred strong work force into eight newly created entities and went on trading. The director then proceeded to flee the country with over eight million dollars in unpaid taxes. The labor hire firm continues its trade activities without complying with the set down obligations. Rule Australia’s regime of corporate law is based on the Corporations Act 2001, which provides for the separation of control and ownership and imposes specific duties on directors, aimed at ensuring that they stay loyal to the company (Macmillan, 2012). The duties that are expected from the director are, in addition to those they have, under general law. If a director gets involved in phoenix activities, then he or she breaches several director duties such as duties that concern proper information use, duty not to allow a company to keep accumulating debt during insolvency, and the duty of good faith. Fraudulent phoenix activity could also involve contraventions of part 5.8A provisions of the corporations ACT that aim to protect the entitlement of employees, as well as voidable transactions. During these circumstances, civil recovery mechanisms, coupled with other general law features, which seek to protect company members and creditors against operators with unscrupulous intentions, may be started (Pennington, 2011). However, the Act required several amendments as ...Download file to see next pagesRead More
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