You’ve probably heard of it and may even have a basic understanding, but what is illegal phoenix activity, and how can you avoid your business being affected by it?
It’s a term used to describe a situation in which a new company is created to continue the business of another company, which has been liquidated to deliberately avoid paying outstanding company debts and liabilities, including taxes, creditors and employee entitlements.
PWC’s 2018 report on the Economic Impacts of Potential Illegal Phoenix Activity considered the effect of potentially illegal phoenix activity on the economy, and estimated that in the 2015 – 2016 financial year the practice cost:
Employees between $31 million and $298 million in unpaid entitlements;
Australian businesses between $1.16 billion to $3.17 billion; and
The Australian Government $1.66 billion in unpaid taxes and compliance costs.
Economy-wide, PWC estimated that the net effect to the Australian economy of potential illegal phoenix activity was between $1.8 billion and $3.5 billion lost GDP.
How can you protect your business from the economic impacts of illegal phoenix activity?
Undertaking due diligence on customers before performing or providing large amounts of work may help you identify risk factors before your customer’s outstanding invoices and debt get out of control and you are owed too much money. Understanding and being able to identify relevant risk factors and warning signs may also help you manage existing relationships with customers.
Here are some tips.
Before agreeing to undertake work for a company or business, or entering into a contract for goods or services, you could:
a) Run a historical company search the entity. This will provide you with:
the details of current and former company director(s) and shareholders; a history of the ASIC filings of the company; and
confirmation that the company is in fact registered, and is not presently in administration or liquidation, or the subject of a strike of action by ASIC.
b) Run a credit check on the entity, which may identify any payment defaults and unsatisfied
court judgments. You may wish to run a check using Dunn & Bradstreet and Creditor Watch
as the data they have collected may be different;
c) Undertake a ‘cross-directorship’ search to ascertain if a director of the company is involved
in any other entities, and whether any of these entities are currently, or have been, in
administration or liquidation;
d) Search the internet for information about the company, including social media. If a company
is not paying its employees or creditors, complaints may appear on social media and internet
e) Undertake a PPSR search to see how many would-be creditors have a secured interest in the
company’s property; and/or
f) Undertake a bankruptcy search in relation to directors of the company.
The level of investigation into a company may depend on a variety of factors, and you may not wish to undertake all of the options. However, you may want to consider undertaking additional due diligence where the following factors are present:
a) A historical company search shows that a director has resigned from the company, and another director that appears to be related to the first has been appointed in their place;
b) The company is providing goods or services well below market rates. This can be an indication that tax and other overheads are not being factored into the company’s pricing;
c) You are aware that the director of the company has run other businesses that have failed;
d) The person who you understood to run or own the company is not a named director of the company;
e) You are dealing with a company that sits in an industry with higher than average instances of potential illegal phoenix activity including:
a company in one of the following industries: building and construction, labour hire, payroll services, security services, cleaning, computer consulting, cafés and restaurants, and childcare services;
a company located in regional Australia in the mining, agriculture, horticulture or transport sector.
f) There are multiple companies set up by the same people with very similar names;
g) The company does not appear to have filed any forms with ASIC beyond their initial
application to set up the company; or
h) You can see from a credit report that the company has payment defaults registered against
it, or an unsatisfied court judgment.
You may wish to proceed in doing business with a company that demonstrates one or more of the above risk factors, however in doing so you might also want to consider registering a security interest on the PPSR to secure your interests.
Red flags for Existing Customers
ASIC alerts can be activated for a company, such that you will get an email when a change is made to an organisation, such as the resignation of a director or a change in their address.
We have identified below some red flags to keep an eye on in relation to existing customers or suppliers:
a) A director “resigns” on ASIC, but is still in effect running the company;
b) Assets are shifted from the company to another entity (though in practice this can be
difficult to see);
c) The company asks to be invoiced in a new company name; or
d) The company is not able to pay debts to you as they fall due, and they are having difficulties
with other suppliers or customers.
Finally, where possible obtain a director’s or personal guarantee. In the event the company is wound up you may be able to collect against the director or owner personally.
Terri Bell & Co can assist you with:
a) Developing a due diligence framework for your business to implement before you enter into a contract with a customer or supplier;
b) Undertaking due diligence investigations on your behalf before you enter into a contract with a customer or supplier;
c) Setting up a monitoring system for large clients;
d) Considering if you should register your interest on the PPSR, and ensuring you have a right
to do so in your contracts; and
e) Drafting a director’s or personal guarantee.
Business is hard enough without having to deal with escalating and possibly unrecoverable debts.
Terri Bell Co works with a range of businesses including the trade and transport sector and we have expertise in a range of areas including disputes and debt recovery. We offer solutions at rates that might surprise you.
If you would like to discuss anything covered in this article or you have any questions about our services, please do not hesitate to contact our office.
You may also wish to take advantage of a complimentary and no obligation 15-minute telephone call with one of our lawyers. Or call us now to have a chat about how our team can help your business recovery any outstanding money owed to you.
This guide should not be relied on as a substitute for obtaining legal, financial or other professional advice. It is intended to provide general information only and is not intended to be comprehensive. The contents do not constitute legal, financial or taxation advice and must not be relied upon as such. You must seek specific professional advice tailored to your personal circumstances before taking any action based on this publication.
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