The Potential Economic Gains from Increasing Public Law Enforcement against Illegal Phoenix Activity

Abstract

Illegal phoenix activity — the practice of liquidating or abandoning acompany with the intention of avoiding its obligations and then continuing the same or a similar business via a new or related company — is estimated to cost the Australian economy up to $3.5 billion per year and appears tobe increasingly prevalent. Yet public law enforcement agencies rarely take enforcement action against illegal phoenix activity. This article argues that, based on an analysis of the potential costs and benefits of increasing public law enforcement against illegal phoenix activity, enforcement should be increased, subject to periodic review. Empirical studies suggest that the aspects of enforcement that are most likely to produce general deterrence of wrongdoing are the perceived probability of apprehension (ie detection and commencement of enforcement action) and, to a lesser extent, the perceived probability of punishment (ie a sanction being imposed at the conclusion of enforcement action). As such, it is argued that enforcement agencies should increase the probability of apprehensionand punishment and use the media more innovatively to heighten potential perpetrators’ perceptions of such probability. Given the reportedly substantial and escalating costs of illegal phoenix activity, this increase in enforcement has the potential to be a high-return investment for the Australian economy.