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15 October 2018

Illegal phoenixing costs small businesses over $3 billion annually

A key small business issue we are working on right now is illegal phoenixing. This is costing small businesses over $3 billion annually. Small business owners need to understand what it is, how to identify it and what to do if you think the company you are working for may be planning to go into voluntary administration.

Illegal phoenixing is when a company intentionally moves assets out of the company before going into voluntary administration. This means the company has no money to pay creditors, who are often small businesses.

If there is any money left, secured creditors come first, the employees are paid wages owing out of the federal government’s FEG (Fair Entitlement Guarantee) and the small businesses are left with nothing.

We handled a case recently where a major subcontractor on a Government project went into voluntary administration/liquidation. An associated company ended up being in a position to buy back the plant equipment that was being sold for $1 million and all the subcontractors got was 4.05 cents in the dollar.

Proposed legislation

Fascinatingly until now, there was no law against illegal phoenixing. In August the Government released draft legislation for a package of reforms to tackle illegal phoenixing. It clearly identifies which activities, in the course of transferring assets, are illegal.

We were particularly pleased to see a focus on company directors. At the moment, directors can move money out of a company, put the company into liquidation and then go on and set up a new company with a slightly different group of directors and start all over again.

Under the proposed Government law reforms, directors won’t be able to transfer company assets that affect creditor payments, and they won’t be able to backdate resignations to avoid liability or leave the company as an empty corporate shell.

Also on the radar are pre-insolvency advisers and other facilitators, who would be penalised for dodgy company asset transfers. Holding these facilitators accountable would reduce access to the specialist knowledge required to deliberately liquidate an entity with the intention to operate and profit through other trading entities.

The other two actions we support in this space is the Director Identification Number and the statutory trust model.

As recommended in the Murray report, a deemed statutory trust set up for projects over $1 million would enable money owned to subcontractors to be quarantined in a separate legislated account and not available for use by the company. It could only be used to pay the people who did the work – the small businesses.

And the Director Identification Number as recommended by the Productivity Commission would ensure rogue directors couldn’t be involved in multiple instances of phoenixing and corporate fraud.

How to protect your business

The following steps to protect your business should be done before entering into a business arrangement:

  • confirm the entity is registered and its Australian business number (ABN) is valid
  • search the online ASIC Connect registers to ensure the company you are working with is a registered entity and if it is in liquidation or external administration
  • ask for references
  • do a credit check on the entity
  • complete an online search on the company and its directors for any adverse media reports.

We will continue to support measures that disrupt the core behaviours of illegal phoenixing and level the playing field for small businesses suffering at the hands of these unscrupulous companies and their directors.