Many creditors are often left frustrated by what seems at times a lack of prosecution of the perpetrators of Phoenix activity, but is that about to change?

Raids undertaken

In June of this year more than 100 ATO Officers as part of a joint ATO, Federal and State police operation into fraudulent phoenix activity took part in unannounced raids into more than a dozen Sydney law firms, accounting practices and liquidators offices.

It is alleged the network of Sydney professionals may be helping to set up phoenix businesses where tax revenue of more than $40m was at risk.

The ATO is particularly concerned where third parties (e.g. Registered Liquidators) that are meant to be independent and transparent may be assisting directors in this process.

It is estimated phoenix activity costs the Australian economy up to $3.2 billion each year. Creditors caught out by directors engaging in illegal phoenix activity suffer the most, losing almost $2 billion in unpaid debts and the non-supply of purchased goods and services so increased attention on exposing illegal phoenix activity is long overdue.

Inter-Agency Phoenix Forum & Phoenix Taskforce

The increased attention is not just the focus of the ATO. A number of federal agencies are paying more than just 'lip-service' to this troublesome area and are joining together in a whole of government approach to curtail phoenix behaviour.

Recently we have seen the creation of the Inter-Agency Phoenix Forum which is made up of representatives from: 
- Australian Crime Commission 
- Australian Federal Police 
- ASIC 
- Department of Education, Employment and Workplace Relations 
- Fair Work Building & Construction 
- Fair Work Ombudsman 
- State Revenue Office 
- ATO 
- Australian Business Register

The members of the forum are looking to work cohesively and share data between departments to enable resources to be focused on those engaged in phoenix activity. Previously the ability to share information across government agencies was limited and in some cases not legally possible.

In addition, earlier this year the ATO established its Phoenix Taskforce. The Taskforce is teaming with the new Serious Financial Crime Taskforce to share intelligence and information between partner agencies to facilitate the identification, management and monitoring of suspected criminal behaviour.

But when is a Phoenix not a Phoenix?

Illegal phoenix activity involves a transfer of assets from an indebted company to a new company for no or inadequate consideration. Often the new company will have essentially the same directors and be involved in similar activities. By doing this the parties set out to deliberately avoid paying creditors, tax obligations or employee entitlements.

Unfortunately the term phoenix is a term that has many definitions including legal phoenix, illegal phoenix and fraudulent phoenix.

A legal phoenix occurs where the assets of a company are sold for fair value to another company prior to the appointment of a Liquidator. Providing fair value has been paid there is little that a Liquidator can do to overturn the sale. Understandably even in these situations creditors and at times the Liquidators appointed are unhappy about this outcome. You will note the information now on the ASIC website tries to focus creditors away from the more general term of phoenix and focuses more on illegal phoenix activity.

Fraudulent 'phoenix' activity is a term that is preferred by the ATO and in their view occurs where a company deliberately liquidates to avoid paying in the main taxes and employee entitlements.

Businesses reborn through the phoenix process often exhibit a number of similar traits. Typically these are: 
- The directors of the new entity are family members of the director of the former company or are close associates, such as managers, of the former business. 
- A similar or identical trading name is used by the new entity which often has a company name similar to that which it replaced (e.g. NewCo (Aust) Pty Ltd). 
- The same business premises and telephone number (particularly mobile number) are used by the new entity. 
- A number of employees of the former business are likely to have been transferred over to the new entity.

None of the above however automatically mean that illegal or fraudulent behaviour has occurred. Often the only party that is prepared to buy the assets of the distressed business is the director. Likewise often the only way the director knows
how to earn a living is by continuing to work in the same industry doing the same work as the company in liquidation did previously.

However where physical assets or intangible assets such as intellectual property or goodwill have been transferred to a new company for inadequate consideration or there is a history of systematic rolling of companies into liquidation that is great cause for concern and definitely an indication of illegal phoenix activity.

What damage does Illegal Phoenix activity do?

Whilst the ATO is sometimes the only creditor "left behind" in the old entity once the phoenix commences, there are other hidden costs that are not easily recognisable. These can include: 
- by not paying their fair share of tax the company is able to seriously (and unfairly) undercut it's competition which in turns causes viable companies to fail; 
- workers are pressured to take leave whilst the business is transferred from the old entity to the new; 
- workers can have their employment status changed from permanent to casual; 
- workers are underpaid or paid irregularly; 
- superannuation payments are not made; 
- warranties or guarantees provided for workmanship by the old entity become unenforceable/worthless; 
- company owners or directors enjoy an extravagant lifestyle at the cost of creditors who don't get paid.

How can it affect me?

The ATO doesn't stand alone in the queue of unpaid entities. Trade creditors too, are often victims of illegal phoenix activity as they can often be viewed as part of the baggage to be left behind as the director aligns the newly birthed
company with new suppliers who are unware of the company's trading history.

What can I do?

Be vigilant. Sometimes creditors or suppliers to the business are unaware of the change from the original company to a new company but may receive an apparent innocuous request to change the invoicing entity from the former to the new trading entity.

By working as a united community, credit professionals can help to impede the spread of illegal phoenix activity by being tough on debtors who leave them behind or by making it difficult for the new entity to get supply. 
- Ensure you do adequate background checks on new credit applications to help stop these newly born phoenix companies from getting supply. 
- Refuse to supply companies that are associated with directors who have a history of multiple failures. 
- Make it known to your fellow credit professionals what you are seeing so that they too can be proactive in taking a stand against these operators. 
- Seek to wind-up entities that you suspect of being illegally phoenixed so that ASIC may take banning action against directors with a history of corporate failures.

If your debtors are in financial difficulties it is important they seek specialist insolvency advice from someone you know and trust.

Through a structured workout or a bone-fide insolvency appointment, solutions can be found that will enable you to ideally collect on your debt or help to halt illegal phoenix activity. u

Both Robyn Erskine and Adrian Hunter present regularly to discussion groups on this topic and are Official Liquidators within the practice of Brooke Bird – Restructuring, Turnaround and Insolvency Specialists. Ph: (03) 9882 6666 E: info@brookebird.com.au

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