As per ASIC's website, following is an explanation of Illegal Phoenixing Activities which is rife in the corporate world and particularly in the building industry.
"Illegal phoenix activity involves the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements.
The directors leave the debts with the old company, often placing that company into administration or liquidation, leaving no assets to pay creditors.
Meanwhile, a new company, often operated by the same directors and in the same industry as the old company, continues the business under a new structure. By engaging in this illegal practice, the directors avoid paying debts that are owed to creditors, employees and statutory bodies (e.g. the ATO).
Illegal phoenix activity is a serious crime and may result in company officers (directors and secretaries) being imprisoned".
Phoenix Companies are often set up long before the old company is liquidated and it is always at the expense of creditors and staff, not to mention the public purse as in the ATO.
The practice is illegal with serious consequences but that doesn't stop unscrupulous company directors.
The Cost Of Illegal Phoenix Activity
Fair Work Australia put the cost at potentially more the 3 billion annually but that would be based on those that are exposed or caught.
The report, Phoenix activity: sizing the problem and matching solutions, estimates that the annual cost of illegal phoenix activity is:
- up to $655 million for employees, in the form of unpaid wages and other entitlements
- up to $1.93 billion for businesses, as a result of phoenix companies not paying debts, and for goods and services that have been paid for but not provided, and
- up to $610 million for government revenue, mainly as a result of unpaid tax – but also due to payments made to employees under the General Employee Entitlements and Redundancy Scheme (GEERS) now the Fair Entitlement Guarantee (FEG).
Those affected by illegal phoenix activity include employees of the original failed company, other businesses that are owed money because they have supplied goods and services and statutory bodies like the Australian Taxation Office.
Modus Operandi
Numerous Parliamentary committees and other bodies have made attempts to identify phoenix activity.
The University Of Melbourne summarises illegal phoenix activity as follows:
"Fraudulent phoenix activity is of great concern to Australian policymakers. It occurs where there is the deliberate liquidation of a company to avoid paying debts but the business continues through another company, and in corporate groups through the liquidation of undercapitalised subsidiaries and transfer of business to other companies in the group. This behaviour causes huge losses in taxation revenue and large financial losses for employees and unsecured creditors. To strengthen Australia's economic fabric, this project aims to determine the optimal method of dealing with fraudulent phoenix activity through a thorough examination of all of its aspects in Australia and by a comparative analysis of international responses".
That is a excellent description of what appears to have occurred with a company we on Subbies United are dealing with right now which is in liquidation with debts of over 18 million.
A new entity was set up with a family friend and ex employee as a director 10 days before the old company called in Liquidators.
The nominee licence holder is the old entities nominee licence holder. Then Liquidators were appointed to the old company and existing business has been transferred to the new company so they could continue on as if nothing ever happened.
As with the old company, the new one will be undercapitalised and history is bound to repeat itself.
This is speculation but there is evidence to suggest that there are issues with this new entity as they have been reported to QBCC and ASIC who are investigating.
Read about the QBCC warning here.
The QBCC say they are vigilant in their quest to stop illegal Phoenix activity. For years it has been rampant in the South East Queensland Construction Industry, here today, gone tomorrow and back with us the following day.