It’s been nine years since someone suggested a way to stop company directors from avoiding creditors by creating a ‘Phoenix’ company.
‘Phoenixing’ describes the process when a new business arises from the ashes of a liquidated company. It’s a loophole that allows unscrupulous people to leave their debts behind with the liquidated company and start afresh (leaving creditors out in the cold).
The total cost of Phoenixing to the Australian economy is estimated to be between $2.9 billion and $5.1 billion annually, according to the Australian Taxation Office (ATO). It is typically done by transferring assets to the new entity (leaving liabilities with the old company). ‘Dummy’ directors are used to set up the new company. Dummy directors play no actual role in the company. Liquidators and investigators have uncovered instances of people who had no idea they were a director of their spouse’s company. They have also found homeless people, distant relatives, fictitious names and variations on real names. (Donald Duck is apparently a director of several companies. Ed.)
The Phoenix Project, an academic investigation, has long been investigating this tactic and how people get away with it.
The project was initially set up by Professor Helen Anderson, then of the University of Melbourne, in collaboration with Monash University. She first suggested using a 12-point identity check in 2013 and it was one of the key recommendations in the 2017 Phoenix Project report.
The first problem for corporate enforcers is that setting up a new company while the other is in liquidation is technically legal. There have been many instances when a new company legitimately arises from the wreckage of an insolvent one (company restructures, buyouts, rescues etc).
These arrangements are usually supervised and strive to ensure creditors and employees are paid what they are owed.
The illegal Phoenix company, however, ignores creditors and allows the principals to continue in business unchallenged.
I’m sure we’ve all read about the more egregious examples. They usually happen in the construction industry. Subcontractors and tradies turn up to the building site as usual, only to find the gates locked and the ‘boss’ nowhere to be found. While liquidators take over the business, these unsecured creditors take their place at the end of the queue. Meanwhile, the principals have a new banner at a site elsewhere in town. This gives the media plenty to rant about, but it solves nothing.
Writing in The Conversation in 2016, Prof Anderson said the aim of illegal phoenix activity was to defraud taxation authorities, trade creditors and employees. She said the practice is widespread in Australia, with a Productivity Commission report in 2015 finding there were between 2,000 to 6,000 phoenix companies operating here. A Senate Economics References Committee inquiring into the Australian construction industry found illegal phoenix activity was a problem “throughout the economy”. The committee suggested it was “a significant culture of disregard for the law”.
The long-running exercise to stop this happening is being driven by the Australian Taxation Office, which is at the top of the creditor queue. In a new regime, the ATO is bringing 30 different business registries under the one entity, Australian Business Registry Services.
ABRS deputy registrar Karen Foat said this would allow regulators and advisors to obtain a more complete picture of a director’s corporate history. Ms Foat said it would also help authorities crack down on illegal phoenix firms.
“These are companies that time and time again wind up their firms leaving employees without salary, entitlements and superannuation, as well as leaving contractors, other businesses and government in the lurch,” she wrote in an Australian Financial Review feature.
Ah…so you didn’t know? The deadline is November 30 and if you don’t apply in time you are liable to a fine of up to $13,000.
There are 2.5 million company directors in Australia, with more than 1 million of them yet to apply for their unique, 15-digit Director ID number (DIN). An ABC item updated this week reported that more than 1.5 million directors had applied for (and had been issued with) a DIN since it was introduced in April last year. This leaves about one million directors who have just five days to apply.
A DIN is a unique identifier given to a director who has verified their identity with the ATO. It is much like the 12-point identity check we all endure to open a bank account.
Until this process began in 2021, company directors could be signed up without much in the way of verification.
She Who is Also a Director signed up for a DIN, as did I. It was a bit of a palaver as you had to use the Federal Government’s myGovID mobile phone app. I already had an account but had to go through several stringent steps to prove my identity. #wehatetechnology
Those who need to apply include company directors, corporate trustees (of an SMSF) and directors of charities and not-for-profit organisations. In short, anything registered under the Corporations Act, including directors of foreign companies registered with ASIC and carrying on business in Australia (no matter where they live).
The ATO acknowledges that the vast majority of company directors behave with ‘extreme probity’, which is consistent with the trust the Australian community places in them.
Yes indeed, we acted with said extreme probity when applying for our director ID last month. The one major problem with a 15-digit number is, how the hell do you remember it? Oh right. Log on to your ABRS account and voila. No hackers here.
We mentioned this topic briefly a few weeks back when investigating the flurry of data breaches and hacking going on within large organisations. Ironically, ASIC warned company directors last month that email and text scammers were posing as the ABRS. As always, do not click on links or divulge your personal details in these instances. It’s not called ‘phishing’ for nothing.
Prof Anderson, who has since retired from the University of Melbourne’s School of Law, said the issuing of a DIN would enable tracking of directors who have been involved in multiple failed companies. It would also reveal fictitious directors, the bane of credit rating agencies and the ATO.
“Requiring would-be directors to quote their DIN on applications to incorporate companies would let ASIC build a valuable database of directors’ corporate histories, helping it to identify repeat offenders and candidates for disqualification from managing corporations.”
I’ll admit this week’s FOMM is a little arcane, reporting on a topic you only ever read about in law and accountancy journals.
But we all ought to be concerned about rorts that potentially cheat the country of up to $5.1 billion a year. Almost everyone would know of a subbie or tradie who got burnt in circumstances just as outlined here.
I’m sure you will agree that everything would work better if we all acted with ‘extreme probity’.
I initially misread this as ‘extreme Proby’ which says a bit about my youthful musical obsessions. Probity means ‘complete and confirmed integrity, uprightness and honesty’. Proby (with a PJ) means a deep voiced pop singer whose best-known hits were songs from West Side Story.
Leaving you with an offering from DJ Probity.