Phoenixing drains the Australian economy of up to $5 billion every year.
Illegal phoenixing happens when a new business “rises from the ashes” of a failed one. It’s a calculated move where business owners deliberately shut down their company to dodge debts, then start a new business that runs the same operations.
But not all company failures involve illegal phoenix activity, so it’s important to know the difference.
What is a Phoenix Company and How Does It Work?
Phoenix companies use a calculated business strategy where directors choose to liquidate one company and move its assets to a new entity to avoid paying debts.
Definition
Phoenixing activity happens when assets move from a failing company to a newly created entity. Here’s how it usually works:
- Company directors choose to liquidate, wind up, or abandon their business
- Assets move to a new company controlled by the same people
- The business continues operating, often under a similar name
- The old company retains nothing but debts
Importantly, there’s a clear difference between legal and illegal phoenixing. Illegal phoenix activity happens when someone exploits the corporate structure to avoid paying debts. The ATO states that illegal phoenixing occurs “when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts.”
Phoenixing activity in Australia
Illegal phoenixing significantly affects the Australian economy, and the cost continues to grow. Back in 1996. ASIC calculated the costs to be around $1.99 billion, while today they range between $4 and $7 billion a year.
Beyond the financial losses, phoenixing has a human cost too. Employees lose their superannuation contributions, wages, and entitlements, and suppliers and contractors don’t get paid for their services. All of this makes it harder for honest businesses to compete.
Common industries affected
Although illegal phoenixing can happen anywhere, some industries have become hotspots for this activity. These industries include:
- Building and construction
- Labour hire and payroll services
- Security services
- Transport and logistics
- Cafés and restaurants
- Childcare services
Phoenixing often occurs in regional Australia, especially in the mining, agriculture, and horticulture sectors. During a five-year period, the ATO found over 3,700 people involved in phoenixing activities.
Warning Signs of Illegal Phoenix Activity
You need a sharp eye to spot the warning signs of illegal phoenixing. ASIC has listed some red flags that help you spot phoenixing activity early, which could save your business from falling victim.
Sudden company name changes
A struggling company changing its name to its Australian Company Number (ACN) stands out as one of the clearest warning signs. This usually happens right before a new company pops up with a name that looks very much like the original business. The company name might change, but the core business stays pretty much the same.
This pattern isn’t random – it’s a calculated first move in the phoenixing process.
Same directors, same assets, new company
Asset transfers sit at the core of phoenixing activity. Directors or former directors usually move assets from the old company to the new one at prices far below market value. The new company runs the same business as before, usually from the same location, with the same assets and employees.
Things look even more suspicious when the new operation keeps the same contact details, phone numbers, email addresses, and marketing materials like websites and advertising accounts.
The biggest red flag? The same people who ran the old company control the new one, though they might try to hide this fact.
Unpaid entitlements and missing payslips
Employees should watch out for workplace irregularities that might point to illegal phoenix activity:
- No payslips or cash-in-hand payments
- Pay below minimum wage
- Missing super payments or other entitlements
- Payslips showing an unexpected employer name
- Wages paid late
Illegal phoenix activity costs Australian workers hundreds of millions each year in unpaid entitlements.
Who Is Involved in Phoenixing?
Illegal phoenixing operations need a network of collaborators who each play specific roles in the scheme. You need to understand these key players to identify and prevent phoenixing activity in Australian businesses.
Phoenix operators or controlling minds are the ones who profit most from illegal phoenixing. These people end up making money from illegal asset transfers while dodging debt payments. In bigger operations, these controlling minds hide their involvement by putting dummy directors in place while they pull the strings from behind the scenes.
Pre-insolvency advisers often encourage illegal phoenixing schemes by cold-calling companies that are having money troubles. The industry has very little regulation in Australia, and practitioners come with different qualifications and experience levels. These advisers usually have networks of “friendly” professionals who help carry out phoenix strategies.
Negligent liquidators skip their professional duties. They don’t look into company affairs properly, fail to get back illegally moved assets, or don’t tell regulators and creditors what they find.
Valuers hired by pre-insolvency advisers give artificially low prices for company assets. This helps move these assets at below-market rates.
Dummy directors are the most visible cover for illegal phoenix operations. These people might be relatives, friends, or associates of the owners, but they have nothing to do with running either business.
How to Protect Yourself from Phoenix Companies
When you can recognise the signs of illegal phoenix companies, you can protect yourself and your business.
Due diligence and credit checks
You can spot phoenix operators early and save your business from major headaches by taking these steps before working with any company:
- Check if their ABN is active on ABN Lookup
- Look up ASIC Connect registers to make sure they’re not in liquidation
- Look into the directors’ past involvement with liquidated companies
- Watch out for quotes that seem too good to be true
- Using the PPSR to secure your interests
Reporting suspected phoenixing to the ATO
Red flags of phoenixing activity need quick action:
- Fill out the ATO tip-off form
- Reach out through their hotline at 1800 060 062
- Send details to phoenixreferrals@ato.gov.au
Understanding your rights as a creditor or employee
Employees who haven’t received their entitlements should:
- Reach out to the Fair Work Ombudsman for unpaid wages
- Let the ATO know about unpaid super
- Contact the liquidator for information about unpaid entitlements
Protect Yourself with SV Partners
Despite stronger regulations, illegal phoenixing continues to disrupt the Australian business world. Learning about these schemes is your best defence against becoming a victim.
If you’re worried about making the right decision for your company and creditors, SV Partners is here to help you take control. Our specialist insolvency accountants will help you meet all obligations and find the right path forward.
Don’t fall into a phoenixing trap. Contact us now for an obligation-free consultation with our expert team.