By Roger Mendelson
The writer is CEO of Prushka Fast Debt Recovery and a Director of Mendelsons National Debt Collection Lawyers.
The Federal Government has recently released a position paper in relation to proposed anti-phoenixing laws, which it intends to introduce.
The Minister for Revenue and Financial Services has called for submissions.
We have reviewed the proposals and believe that they do little to help both SMEs and the private sector generally.
The thrust of the changes are aimed at illegal, fraudulent phoenix operators.
Basically, these are people who intentionally create a company with a view to operating a business from it, incurring debts and failing to pay BAS obligations and probably also superannuation levies and other obligations to the government, as well as other creditors.
When the heat from the ATO and creditors builds up, they simply jettison the company and begin business in a new corporate structure, leaving the creditors of the old company high and dry.
There have been attempts made to stop such action in the past, with the most recent changes being The 2012 'Phoenixing Act' and the 2012 'Similar Names Act'. Both Acts were deeply flawed and of no effective use.
It is arguable that there are already adequate measures available against phoenix operators and that the major problem has been a lack of resources and resolve within ASIC to stamp the practice out.
The proposed changes will have some benefit in that a particular number will be allocated to each director (Director Identification Number DIN) and this will make it easier to track directors and also to limit the use of "straw directors" (being either false names or alternatively, real people but who lack any assets and probably have no permanent address).
In my view, the proposed changes are essentially planned in order to protect the tax revenue. Whilst there can be no real objection to this aim, the only problem is that it comes at the expense of other creditors. That is, the more special rights there are for the ATO, the less money there will be left over for other creditors.
THE REAL PROBLEM
The major problem faced by businesses and credit managers is not fraudulent phoenix operators but directors who operate companies which are clearly undercapitalized or have a business plan which has a low chance of success or directors who are simply incapable of running a business successfully.
You will have all dealt with situations where the one director may be traced, through searches, to two or three failed businesses which, in each case, have been bled dry, with nothing left over for external creditors.
Savvy credit managers will do credit checks and impose credit limits, in order to not be caught out by such operators. In most cases, they will also insist on obtaining guarantees from the directors.
However, most business operators lack the resources of a sophisticated credit department and these are the businesses most at risk of losing money.
Implementation of our proposals would be quick, easy, cost very little and impose minimal bureaucratic obligations on the business community. We believe that, if implemented, they would substantially reduce the risk of granting credit to SMEs.
REGISTER OF STATUTORY DEMANDS
Currently, Statutory Demands made under Section 459E of the Corporations Law are not publically recorded.
In our experience, service of a Statutory Demand is the most effective, quickest and cheapest way to force payment action from a company, where the debt exceeds $2,000.00 and where it is not subject to dispute.
We propose that a register be set up of Statutory Demands served, which are not satisfied.
This would be a searchable register and it would provide a warning to credit managers. In many cases, if the Statutory Demand is not satisfied, the creditor does not proceed to liquidation, due to the cost involved (approximately $5,000.00) and the perceived risk of there being no return.
If the directors fail to satisfy a Demand and keep the company trading, they become liable for insolvent trading claims by later creditors. However, this procedure is rarely used.
If the register were in place, it should be easy to search by ACN and if there are one or more unsatisfied Demands having being served, then warning bells should ring.
We recommend that directors of a company should be obliged to sign a "Solvency Statement", if requested to by business, which intends providing credit of over a fixed sum of say $5,000.000 to that company. The statement would certify that the directors are of the reasonable belief that the company is solvent and if the company ultimately fails to pay a genuine debt for over $5,000.00 and the creditor has relied on the Solvency Statement, it would then be entitled to sue the directors for the amount of the debt. The sole defence would be that the company's financial situation subsequently deteriorated.
IMPROVEMENT IN DEREGISTRATION OUTCOMES
Voluntary deregistration is initiated by the directors and it involves them in signing a Statutory Declaration, declaring that the company has no creditors at the time the deregistration request to ASIC is made.
However, every credit manager will have come across a large number of cases where they are chasing a debt and the company has been deregistered, meaning that the directors must clearly have sworn a false declaration.
Shady directors often use this process to get rid of a company which is insolvent, because it is a cheap process and it is not subject to investigations by a liquidator.
ASIC should allocate resources to these companies and take action against directors who swear false affidavits. In addition, it should then be possible for creditors to sue such directors for their loss.
DEREGISTRATION BY ASIC
A large number of companies are deregistered by ASIC every year. Upon deregistration all of the assets of the company are supposed to vest with ASIC.
Although many of these companies would have few tangible assets, many of them would have asset loans, made to shareholders, directors and other associated parties and these are assets which should vest in ASIC and be subject to action to recover those assets.
Failure by ASIC to carry out this step simply aids both fraudulent phoenix operators and other dodgy directors.
The submission made may be accessed at https://www.prushka.com.au/publications.cfm
The writer is CEO of Prushka Fast Debt Recovery Pty Ltd and is principal of Mendelsons National Debt Collection Lawyers Pty Ltd. Prushka acts for in excess of 55,000 small to medium size businesses across Australia and operates on the basis of NO RECOVERY – NO CHARGE. www.prushka.com.au. Free call 1800 641 617. The writer is also author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers.