The regular tribulations of the Global Financial Crisis in the guise of unemployment and financial struggles have been dwarfed by a more sophisticated evil. Fraudulent activities and organized misbehavior disguised under a trend, known as ‘Phoenix activity’, although not a new trend, is gaining momentum in Australia in recent times. What is Phoenix activity? Phoenix, the largest city in the US, also known as the Valley of the Sun and the Phoenix activity in Australia, echo the same philosophy to the mythological creature. The emergence of a new entity through fire and difficult times resurfaces to live again and start afresh. These Phoenix companies are ‘revived’ by directors who transfer assets of an indebted company into a ‘new’ company, with a similar name and identical activities of the previous company, doing business incognito but essentially are run by the same directors.

Further, the directors place the initial company into administration or liquidation with no assets to pay creditors, whilst enjoying the fruit of the Phoenix or new company. However, ASIC has been quick to catch on to such fraudulent gimmicks. It has been successful in removing 40 directors from office who have intentionally avoided their responsibilities and have defrauded their creditors.

The Australian Taxation Office and Treasury fear annual costs to be around $700 million to $1.3 billion in resolving these cases. An enforcement program is in place, which is funded by the Assetless Administration Fund.

ASIC Chairman, Mr Jeffrey Lucy, explained that the purpose of the Fund was to assist liquidators to discharge their duties in conducting thorough investigations and compiling reports, which would enable ASIC to implement enforcement proceedings.

However, this is not enough. Bridging the regulatory gap, protecting creditors and discouraging Phoenix activity, needs more stringent strategies in place. Whilst the Fund and the Corporations Act, among other statutory sources, serve in achieving these objectives, the Treasury has proposed stricter changes, which if implemented, will significantly alter the personal liability of directors.

The proposed paper, "Action Against Fraudulent Phoenix Activity"^[1] , recommends several key changes. To cite a few, for instance, the current taxation rules entitle the Commissioner to preempt tax liabilities by requesting a bond from a director where he foresees or considers a risk of Phoenix activity. The new rules recommend widening this preemption by including other liabilities. Further, a high penalty is also to be imposed for failing to provide such a bond.

Other changes apply to payment of liabilities. For example, the Director Penalty Notice is to be replaced with an automatic penalty and personal liability on the director after 3 months from the due date for payment of statutory liabilities. Earlier, directors were liable for just PAYG. Under the new regime, directors will also be held personally labile for outstanding superannuation, GST, excise and income tax.

The ideal outcome would be for a reduced number of Phoenix activities and directors who are more honest and diligent in their conduct and duties. Until this positive change completely sets in, ASIC will continue intervening but earlier on this time with the help of the stricter proposed rules, the Assetless Administration Fund and the information provided by liquidators. Directors, instead of feeling scared and threatened should view these changes positively and seek to turn around their companies and avoid severe legal penalties.

ASIC’s surveillance initiative ensures that company officers barred from running their companies comply with their disqualification or else they will face the threat of criminal proceedings.

It has been a little over a year since the Global Financial Crisis. The Australian economy is emerging boldly. This should inject a new impetus to companies and directors who are struggling to provide opportunities for genuine growth and trade and to discourage any unwanted Phoenixes. On the one hand, strict rules will punish dishonest directors but the innocent ones along with their creditors may wrongfully and unfairly bear the brunt of such a strict regime.

^[1] http://www.treasury.gov.au/contentitem.asp?NavId=002&ContentID=1647

How often have we consumers and buyers found ourselves in negotiations for work or services at the receiving end of a quote? 'More often than not' would be a common response and observation.First time home buyers for example love shopping around for quotes before taking the plunge. After buying the perfect house, painters and contractors are brought in. These service providers will usually make a quote before offering their services. This has become the norm.

Receiving a quote is a comforting thought. It offers choice and security. It allows parties to make informed decisions based on their income. However a simple quote can turn into a contract in some situations. The recent judgment delivered by the Supreme Court of New South Wales in Megalift v Terminals [2009] NSWSC 324 warns parties to exercise care and diligence when negotiating a quote as an innocent conversation could turn into a contractually binding offer.

In the above case, Terminals had used the services of Megalift. The latter party was required to discharge a huge storage sphere from a barge on the former party’s premises. It was later discocered that the sphere could not be discharged without excavating some of the land. This miscalculation or oversight caused inconvenience, delay and added costs. Megalift, having provided an unexpected service, not initially quoted for, claimed the extra amount. Terminals on the other hand counter claimed for the excavation costs.

On 28 April 2006, Megalift had sent a revised quotation to Terminals. Subsequently, both parties entered into a contract on 1 May 2006. The Supreme Court was faced with the question of whether a contractual relationship existed prior to 1 May 2006.

The facts of this case are unique in that two agreements allegedly existed. Megalift disputed that its first letter dated 21 March 2006 was an offer capable of acceptance. According to their understanding of quotes and legally binding contracts, this was simply a ‘quotation’ or ‘budget offer’. Terminals treated this as well as the purchase order as a contract, on 4 April 2006. Based on their comprehension of legal obligations, they held Megalift responsible for breaching the first agreement.

So, which agreement was legally binding? Justice Bergin ruled in favour of the first one (4 April 2006), where an offer was made and accepted. Both parties were already in negotiation, discussing terms and details such as transportation and delivery. These conversations involved quotations and although no fixed price was agreed upon, it was nonetheless a contract which was legally binding. Moreover, her Honour disregarded the quotation for the purpose of a budget only. This did not prevent the parties from contracting.

How did the court reach this conclusion? A contract requires an offer and an acceptance. However, are price quotations offers and if they are, when do they become legally binding? Each case should be decided on the facts. The question is one of objective intention of the parties involved. "We quote you" has been held not to be an offer but "shall be happy to have an order from you to which we will give prompt attention" was held to be an offer in a Canadian case. In Canadian Dyers Association v. Burton it was further stated that - "In each case of this type, it is a question to be determined upon the language used, and in light of the circumstances in which it is used, whether what is said by the vendor is a mere quotation of price or in truth an offer to sell."

The commercial context of such negotiations as well as the circumstances in which quotations are discussed, are important considerations. A way to avoid being bound by a mere estimate is to ensure that the quotation clearly states that it is not a binding offer. The next time you make a quote or accept one, just make sure you expressly convey your intention and desire to be bound by the quote.