There has been a lot of talk recently about Phoenix Companies and what this actually is. Phoenixing is when a new company is set up using the proceeds from assets and cash of a previous company that was liquidated. These proceeds should be used to pay out creditors, employee entitlements, and the ATO. However, this is not being done. A new company is usually established with the same Directors involved and in the same industry.
The ASIC have recently been urged to treat this issue with much more urgency than they have in the past as it essentially risks leaving employees, creditors, and the ATO out of pocket, illegally. Like the bird in ancient Greek mythology (or you may recognise from the Harry Potters books), a Phoenix is reborn and rises from the ashes.
Phoenixing occurs when company (A) may have a host of unpaid debts. Company (B) would then be set up to eradicate Company (A) of all its debt, while the infrastructure, assets, and funds are transferred to a new company. It can essentially be the same company, but with no debt. You can imagine the advantage this gives Company B over its competitors who are trading honestly. The knock-on effect of this can be catastrophic and could even result in honest companies in debt and at risk of entering administration themselves.
Annabelle Parry, Director at Slater Byrne Recoveries stated:
“The only solution/prevention for creditors is have a company policy where if a debt hits 90+ days, it is immediately referred to a Debt Collection company. Otherwise, they run the risk of not getting paid at all & the domino effect that can cause can mean the creditor is forced into bankruptcy or liquidation themselves. Another safeguard is to ensure a personal guarantee is signed by a company director ensuring they will pay you themselves in the event anything happens to the company.”
How Phoenixing Affects Businesses
According to a report by ASIC, entitled “Phoenix activity: Sizing the problem and matching solutions”, employees lose up to $655 million in unpaid wages annually, businesses lose up to $1.93 billion, and government revenue suffers a loss of $610 million annually, the majority of this being unpaid tax.
A report conducted by the University of Melbourne and Monash University, which was discussed on the ASIC website, claims it is too cheap and easy for individuals to engage in Phoenixing activity. Moreover, there are not enough ramifications for those who practice it. The report found there are over two million proprietary limited companies registered in Australia and concluded the consequences need to be of a more serious nature.
“It’s too expensive to pursue unless the amount in question is in the tens of millions. Liquidators can’t pursue expensive actions unless they’re funded & ASIC / the Australian Government doesn’t have the funds in their budgets to do so.”
How We Can Help
As a debt recovery firm, we are faced with these scenarios from time to time and are increasingly frustrated when we are engaged too late, only to have to inform the creditor that there is nothing that can be done and the debt must be written off.
“Phoenixing can be prevalent, and the only real thing a client can do to prevent it is act quickly. If someone is stalling/delaying payment, act immediately. Often clients will come to us after 1-2 years of being owed a debt—only find out they have shut down and set up again under a new name to wipe their old creditors & start over. Creditors who apply the most pressure early on are the ones who get paid.”
If you need advice regarding this or have a customer who is delaying with their payments, please don’t hesitate to contact Liam White on 02-9191 4518 for a no obligation discussion.
If you wish to report any activities relating to what is discussed above, you can also contact the Fraud Hotline on 1800 075 152 or email [email protected].