New report finds it's too easy to 'phoenix' companies in Australia

Friday, 24 Feb 2017 13:56:14 | Dan Oakes

The report says ASIC needs to make it easier for the public to access company directors' details. (ABC News: Margaret Burin)

Phoenixing companies, which costs the Australian economy billions of dollars a year, is too easy, cheap, lucrative and is largely invisible, according to a new report into the practice.

What is phoenixing?

When a director strips cash and assets before hiding them and liquidating the company, then restarting
Usually restarted under a different name, 'like a phoenix from the flames'
Done to deny creditors and ATO the money owed to them

The report, by academics from the University of Melbourne and Monash University, also urges the Australian Securities and Investment Commission to crack down on 'pre-insolvency advisers' who help business owners rip off creditors.

Phoenixing occurs when a company's directors strip cash and assets from it, hide them, liquidate the company and then restart it, usually under a different name. Like the mythical bird, the company rises from the flames. This is done to deny creditors, including the Australian Taxation Office, money owing to them.

One of the report's authors, Professor Helen Anderson, told the ABC it was crucial that ASIC made it easier for members of the public to access director details, and therefore safeguard themselves against doing business with serial phoenixers.

"We recommend that ASIC information be free, rather than having to pay a lot of money to poke around," she said.

"The ASIC website [should] be revamped so that rather than simply being able to search the banned directors register, you can look up the company name and find out who the directors are and then you should be able to click on the directors and check their history.

"None of this is private information, all of this stuff can be pieced together if you are willing to pay enough money or if you have enough money to be able to go to a credit reporting agency, so it's certainly not a privacy issue."

Shadow assistant treasurer Andrew Leigh said phoenixing was the equivalent of athletes 'tanking', and was fundamentally "un-Australian".

"As a result of phoenix activity people may be less likely to do the right thing in future, or alternatively it might be that when they go into business next time they don't trust their partners, they try and write everything down," Dr Leigh said.

"Business runs on trust, it's the oil in the wheels of commerce, but phoenix activity puts sand in the gears and makes it harder for good businesses just to get on and do the job."

Recent investigations by the ABC have revealed that a common tactic is to remove legitimate company directors and replace them with 'dummy' directors, who plead ignorance when liquidators attempt to question them about the circumstances of the company's failure.

In some cases, pre-insolvency advisers have altered company details in the ASIC system — using a code known as the 'corporate key' — and backdated the appointments of dummy directors to make it look like they have been directors for a number of years.

ASIC should give details of de-registered companies

The report recommends that every company director should be forced to obtain a 'director identification number' (DIN) using 100 points of identification, and that the public should be able search a DIN database to obtain a director's history.

"Right now you need more identification to open a bank account to become the director of a company," Dr Leigh said.

"But given that we know that phoenix activity is costing Australians as much as $100 per person per year, we need to do more.

"I'd love it if the Government actually looked at sensible reforms like this, which make sure we can track dodgy directors and made sure we raise the reputation of all businesses."

The report also said ASIC should provide the details of every de-registered company and its directors to other members of the Federal Government's anti-phoenixing task force — which includes the ATO and the Federal Police — for cross-checking.

Key recommendations from the report:

Information from ASIC about banned directors should be available for free
ASIC website should be revamped so that it is easier to search
Every company director should have to obtain a 'director identification number' using 100 points of ID
Public should be able to search DIN database to check director's history
ASIC should provide details of de-registered companies to anti-phoenixing taskforce for cross-checking

Pre-insolvency advisers are completely unregulated, unlike liquidators and other insolvency practitioners, and often find clients by cold-calling businesses who have recorded credit defaults, or simply by word of mouth.

The ABC has discovered some are convicted criminals or have links to organised crime, and that when authorities begin to take an interest in them, they simply change names and premises.

The report recommends that ASIC should be far more forceful in prosecuting pre-insolvency advisers, and that directors should be penalised more heavily for withholding company books and records from liquidators.

ASIC should also have the power to ban people from managing corporations for 10 years, rather than the current five, and penalties should be increased for people found guilty of managing companies while disqualified, it says.

A further recommendation is the introduction of 'restricted directorships' for people who have been involved in five or more failed companies.

Those directors would subject to more stringent reporting requirements, and limited to holding no more than five directorships at a time.

'We are doing everything we can': ASIC

ASIC's Warren Day said the corporate regulator would welcome the introduction of identification numbers but pointed to recent successes in detecting phoenix operators, despite what he described as 'constraints' on ASIC's powers.

"ASIC is banning a number of directors who have been involved in phoenix activity," he said.

"What we also want to do though is disrupt this from happening in the first place, what we do know about phoenix activity is this is a learned activity.

"People don't just wake up one day and work out how to phoenix a company, they are learning that and we are doing everything we can given the existing constraints to disrupt that."

AustraliaPlus

New report finds it's too easy to 'phoenix' companies in Australia

What is phoenixing?

ASIC should give details of de-registered companies

Key recommendations from the report:

'We are doing everything we can': ASIC

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