It is estimated that Phoenix Companies cost the Australian economy up to $3.2 billion per year. It is not just businesses who don’t get paid for goods and services but employees often don’t get paid their entitlements, including superannuation. In addition, State Revenue Office and the Australian Taxation Office are left with large amounts of tax debts outstanding. It is a large complex problem which has seen many recommendations over the years but not many changes being implemented.
What is a Phoenix Company?
A report by PWC Australia in 2012 defined a Phoenix Company to be the deliberate and systematic liquidation of a company with the purpose to fraudulently or illegally:
- avoid tax and other liabilities, such as employee entitlements; and
- continue the operation and profit taking of the business through another trading entity.
What is particularly frustrating for businesses that have been left without payment for goods or services they have provided is that the company that owes the money is simply liquidated. Another company is then started with the same intentions to defraud another set of unsuspecting creditors.
What is the Proposal?
The proposal is to introduce identity checks for directors. It has already been adopted in several countries and New Zealand is currently deciding whether to implement it or not.
A recent paper by Helen Anderson of the University of Melbourne recommends the use of Identity Checks for Directors due to its many benefits. Having identity checks for directors would mean that before a person could become a director of a company he/she would have to pass an identity test – in much the same way as what is currently required to open a bank account.
ASIC do not currently require supporting evidence of the identity of the proposed director. In addition, no information that is supplied to ASIC is actually verified. It is therefore very easy for someone to use slight variations of their name – with the intention to hide the fact they have been a director of one or more failed companies. It could be as simple as dropping the use of a person’s middle name for deception to be effective.
However, the introduction of Identity Checks will mean that this strategy would no longer work.
Could Directors get around the Proposal?
Unfortunately, some people will find ways around the new proposal – which in itself does not mean the proposal is not useful but it is only a first step in tackling such a large, complex and costly problem. A common way to get around the proposal is to simply appoint a family member (eg spouse or child) as a director. Brodie Collection Services has had direct experience in this type of fraud. A recent case involved the daughter of a disqualified director being named the director of the company but the Father clearly still made all the decisions.
What can you do to avoid becoming a victim of a Phoenix Company?
The best way to protect your business is to make sure that you make an informed decision about whether to extend credit in the first place. It is much better to refuse to extend credit than to end up providing goods and services and never being paid.
Brodie Collection Services can provide you with the tools to make the right decision about whether to extend credit. We provide customised credit application and guarantee templates, as well as ASIC Checks and Land Title Searches. Most importantly, we can analysis the information from the checks and provide an analysis of the risks involved in extending credit. We have many years of experience in the debt collection industry and know the many techniques people will use to avoid being responsible for a debt.