Phoenix activity involves transferring business assets out of a company that has collapsed (or is about to) with the express purpose of denying those assets being used to reimburse creditors. In some instances, the business continues to trade after its assets are transferred from one company, or legal entity, to another – with creditors often restricted from being able to chase that new company for the monies owed.
ASIC confirmed to My Business that last financial year (2017-18), it undertook 53 investigations into suspected misconduct including phoenix activities, leading to five prosecutions and four directors being disqualified from managing companies.
More recently, a Victorian man was last month banned from managing companies for five years over a series of business failures that racked up debts worth around $3.5 million.
The practice has widespread ramifications, with other businesses often among the victims left out of pocket, while the ATO is one of the biggest losers as tax debts go unpaid.
Indeed, in previous articles about such actions, My Business has received numerous comments from readers expressing their frustration at seemingly lenient punishments for, and disincentives against, the practice, and first-hand experiences of SMEs falling victim to such dodgy and illegal practices.
In a bid to “secure the tax base” by attacking phoenix activity, shadow Assistant Treasurer Andrew Leigh proposed allowing the commissioner of tax to publicly name individuals and companies that are found to have left creditors high and dry.
“These new measures – along with previous commitments such as requiring all company directors to obtain a unique Director Identification Number with a 100-point identification check and increasing penalties associated with phoenix activity – will help protect Australian jobs and the economy,” he said.
Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), said that such an approach adds further disincentive against directors who “burn” companies as a means of avoiding paying other businesses, their own employees and the government.
“This is another approach that could help deal in part with the problem of company phoenixing, which destroys small businesses,” she said.
“The proposal extends to ensuring a closer and more effective working relationship between the Australian Taxation Office and the Australian Securities and Investments Commission to obtain director disqualification orders.”
But Ms Carnell said there is a lot more still to be done to stamp out the practice and shore up supply chains for smaller businesses.
She suggested the establishment “deemed statutory trusts to ring-fence moneys owed to subcontractors so they cannot be instead used to help shore up insolvent businesses”.
“Subcontractors in supply chains are particularly vulnerable as, unlike employees, they are not protected by the government’s fair entitlements guarantee, a safety net to pay unpaid entitlements,” Ms Carnell added.
“Currently, small business subcontractors sit at the bottom of the pecking order.”
Phoenix activity was unveiled as one of the core priorities of regulators in the current financial year, with ASIC and the ATO both outlining their approaches to addressing the issue at the National Small Business Summit in August.