Promoted by Mackay Goodwin.
Phoenix activity is increasingly under the microscope of the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO). This means accountants and other business advisors need to be aware of what constitutes illegal phoenix activity and help their clients avoid engaging in it.
This type of business fraud costs the Australian economy somewhere between $2.85 and $5.13 billion every year. (1) In 2017 alone, there were more than 20,000 phoenix operators in Australia. On average, each phoenix business leaves 44 other businesses in debt. And, phoenix activity jeopardises up to 67,000 employees per year.
Domenic Calabretta, managing director, Mackay Goodwin, said, “Directors of companies caught engaging in illegal phoenix activity are subject to fines and even prison terms. With ASIC proactively investigating companies it suspects of fraudulent phoenix activity, the chances of getting caught are high. Accountants and business advisors should encourage their clients to restructure their business or liquidate it legally.”
Phoenix activity starts when a business can’t pay its debts and so opts for liquidation. This is a legitimate option. However, it becomes illegal when the business transfers its assets to a new company and continues to trade. It’s therefore important for accountants and advisors to ensure their clients understand how to legally transfer assets to restructure a failing business.
The key to fraudulent phoenix behaviour is that company directors are trying to avoid paying creditors instead of making a sincere effort to pay them. They transfer the assets for little or no payment, which helps them avoid paying creditors. These creditors generally include the ATO, employees, suppliers and other partners.
Illegal phoenix behaviour has become such a significant issue that the ATO and ASIC have proposed legislative changes to combat it. The net result of this could include more stringent rules around allowable transactions and more severe penalties against both individuals and corporations.
Domenic Calabretta said, “Not all phoenix activity is automatically illegal. It can be possible to start a new business from the ashes of the old one as long as the liquidation process was legal and ethical. This includes using the company’s assets to pay liquidation costs and creditors, including employees. Since the ATO and ASIC are likely to investigate any company that liquidates its assets, it’s crucial to ensure clients follow this process properly.
“As well as fines and possible prison time, directors could be disqualified from being company directors in the future. Any of these outcomes is far from desirable for clients. Instead, accountants and advisors should work with clients to turn their businesses around before liquidation becomes necessary. By intervening early enough, it’s possible to steer the company through the process and reach a successful resolution.”
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