Imagine doing a deal with a supplier only to find that the company liquidates before you receive the goods or services you paid for. Then, imagine the same directors set up a new company with the same business model – sometimes even the same name – unencumbered by debt, and fooling more people into investing their hard-earned cash. These dodgy activities are the work of a phoenix company, and they’re costing Australian small businesses up to $1.93 billion and the government up to $610 million annually.
Named after the phoenix of Greek mythology – a bird that could rise from its own ashes – ‘phoenix activity’ is defined as: “The evasion of tax and other liabilities such as employee entitlements through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities.”
In other words, phoenix activity occurs when company directors place a company into administration or liquidation, leaving the debts with that entity, and no assets to pay creditors. They then form a new company to continue the old business, repeating the process.
The Australian Taxation Office (ATO), the Australian Securities and Investments Commission (ASIC), Fair Work Australia, and the Department of Employment are working to identify and prosecute people who engage in illegal phoenix activity. But what can you do to ensure the companies you deal with are legitimate?
How to identify a typical phoenix company
A typical example of a phoenix operation is where a group of companies are set up – one of which has a specific role, like labour hire, for example. The labour hire entity has few or no assets and share capital, fails to meet its obligations, and is dissolved. A new labour hire entity is established and the labour transferred under it. Meanwhile, financial benefits from unpaid liabilities are shared among the wider group of companies.
For a small business owner, red flags could be:
- A competitor offering a significantly lower quote than market value
- If the directors of a company you work with have been involved in liquidated entities
- A company requesting payments to a company with a different name
- Recent changes to a company’s director(s) or trading name, where the manager and staff remain the same
What you can do to protect yourself
Proper due diligence is essential to protecting yourself against illegal phoenix dealings.
Before you engage or negotiate with a new supplier:
- Confirm the entity is registered and has a valid ABN
- Search the ASIC Registers to verify that the company is registered and active (and not in external administration or liquidation)
- Ask for references
- Conduct a credit check on the entity
- Look up the company and its directors online, seeking out any negative media reports
How can it be stopped?
The Australian government has several initiatives in place to combat illegal phoenix activity. These include:
- The ATO Phoenix Taskforce: Comprising over 20 federal, state, and territory government agencies, this taskforce aims to provide a holistic government approach to combating phoenix companies
- ASIC’s Assetless Administration Fund: Set up to fund investigations by liquidators into the cause of company failures where there are few or no assets
- ASIC’s Liquidator Assistance Program: Created to help liquidators secure reports and information on companies in external administration
- ASIC surveillance initiatives: Aimed to deter phoenix activity primarily in the construction, labour hire, transport, security, and cleaning industries
- Director disqualifications: Disqualifies company directors for up to five years where they’ve been involved in two or more companies placed into liquidation in the last seven years
Have you dealt with a phoenix company?
If you know of a phoenix company, or if you are concerned you’re working with a company exhibiting phoenix behaviour, you can report it to the ATO online, or by phone on 1800 060 062.
While phoenix companies continue to operate in Australia, proper due diligence and a sound commercial judgement can help you avoid financial loss.
To learn more about running a small business safely, check out these resources.