According to the 2018 report ‘The Economic Impacts of Potential Illegal Phoenix Activity’, the direct impact of illegal phoenix activity on the Australian economy is between $2.85 billion and $5.13 billion annually.
Recent activity to curb it has included the creation of the Inter-Agency Phoenix Forum and the establishment of the ATO’s Phoenix Taskforce. A series of new reforms were also introduced into Parliament earlier this year.
With illegal phoenix activity increasingly under the microscope, it’s important that you, as an accountant or business advisor, are aware of what it looks like, and help your clients avoid engaging in it.
Understanding legal vs. illegal phoenix
The most important thing to highlight is that phoenix activity, by definition, is not illegal. It’s only when certain conditions are met that it becomes fraudulent, as follows:
- Legal phoenix – When the assets of a company are sold for fair value to another company prior to the appointment of a liquidator.
- Illegal phoenix – When the assets from an indebted company are transferred to a new company at no value or below fair value in order to deliberately avoid paying creditors, tax obligations, and employee entitlements.
Understanding this difference between illegal phoenix activity and a company genuinely resurrecting itself is the first step to steering your clients away from trouble. Unfortunately, both have similar traits, which can make it harder to tell them apart.
For example, in both legal and illegal phoenix situations, directors are often family members or close associates of the former company. In addition, the new company in both cases may have a similar name, address, and some of the same employees.
However, it only where the physical and intangible assets have been transferred below fair value, or there is a history of the systemic rolling of companies into liquidation that it may be considered to be illegal phoenix activity.
How to help your clients avoid illegal phoenix
As directors of companies engaging in illegal phoenix activity can face hefty fines and even prison time, it’s important that you encourage clients facing financial difficulties or insolvency to restructure their business or liquidate it legally so they can avoid getting burnt.
As well as looking to you for advice, it’s important they seek the help of a qualified insolvency specialist. A structured turnaround plan or formal insolvency appointment will help them better manage their debt and halt any fraudulent activity.
Smoking out illegal phoenix contracts
In addition to ensuring your clients keep their attempts to stay in business above board, you should also be proactive in helping them avoid getting stung by phoenix companies.
Here are some of the actions key actions you should be recommending they take:
- Regularly review business contracts and run Australian Securities and Investments Commission (ASIC) searches to ensure the companies they are working with are registered.
- Ensure contracts have personal guarantees signed by directors – this will provide your client with security if a company does go into liquidation or administration.
- Carry out an ASIC search for every new contract – tell them to look for wind up documents and company name or ACN changes. Encourage vigilance in checking the finer detail. Sometimes a phoenix company may change only a letter or number in an attempt to go unnoticed.
Where there are indebted businesses, there is phoenix activity. However, this is not always a cause for concern. It can be a legitimate option where the company in question is sold at fair value.
By understanding the difference between legal and illegal phoenix activity, helping your clients turn things around before liquidation is necessary, and ensuring they show due diligence in avoiding it, you can steer them away from the smoke and also keep yourself out of the fire.
If you have a client who is in or heading towards financial distress, get in touch with us today to see how we can help you, help them turn things around.