Phoenix companies involve the winding-up or collapse of a company burdened with debts which then, like the bird in Greek mythology, continues with the same assets, customers and owners, but under a slightly different name. That means it gets away without paying creditors, employees or the tax office. Phoenix companies are illegal and the government has been changing the laws to catch them.

They are not a recent phenomenon. Phoenix activity was exposed in 2001 during the Royal Commission into the Building Construction Industry. That inquiry uncovered at least 18 cases of the corruption. This behaviour has since been identified in several other industries, most notably construction, security, cleaning, information technology, telemarketing and other labour-intensive industries. According to the Fair Work Ombudsman and insolvency specialists, those are the industries where it is most prevalent.

The printing industry has also had its share of companies that re-emerge with similar directors and sharing the same premises as the defunct entity. Singling out specific cases of alleged phoenixes is a delicate issue with potential legal risks. Needless to say, most ProPrint readers will be familiar with firms that have a suspicious track record.

The business model of the phoenix is relatively straightforward. Hypothetically speaking, XYZ Printing is replaced by XYZ Printers. It’s a simple but devious strategy. It allows XYZ’s directors to avoid paying taxes. XYZ’s creditors and employees also go unpaid. What’s happened here is that XYZ has closed shop rather than face creditors. By doing that, it has avoided judgments, defaults, writs and court summons against directors.

Phoenixes have an unfair advantage over competitors. By deliberately avoiding tax debt, entitlements and payments to creditors, they can undercut rivals.

What are the warning signals that a company is about to phoenix? According to a recent Fair Work Ombudsman report, there are red flags. The business might fail to lodge tax returns and business activity statements. Its books and tax records might understate or overstate its operations. It might have withheld payments such as superannuation and PAYG. Its workers might be underpaid, be pressured to take leave or had their employment status changed from permanent to casual. Equipment, machinery and uniforms may not replaced as needed.

Phoenix companies have a number of tell-tale signs. If the directors of the new entity are family members of the director of the former company, or are close associates, alarm bells should go off. Other red flags include a similar trading name, use of the same premises or retaining the same phone numbers.   

The Australian Taxation Office (ATO) estimates there are about 6,000 phoenix companies in Australia. According to the Fair Work Ombudsman, phoenix activity costs Australian employees between $191 million and $655 million per annum. The overall impact of phoenix activity each year is estimated to be between $1.78 billion and $3.19 billion. Hardest hit are the creditors. The growing army of technically insolvent companies systematically churn through suppliers with the intention of never paying them back.

Weak excuse

The classic excuse to defend phoenix companies is that they save jobs. But that line doesn’t wash with the printing industry leaders that ProPrint spoke to for this article. They say that jobs are not protected because phoenix companies tend to collapse again. Phoenix companies, they say, are not creating sustainable jobs. 

Employees could also lose entitlements. For example, if you’re a worker who has been with ‘Company A’ for years and all of a sudden you moved to ‘Company B’, which is a new entity, there are question marks around longevity of service and whether are you are still accruing long-service leave. All that hard work of accruing entitlements in the old entity is at risk of being reset to zero.

However, identifying a phoenix company can be problematic. There are cases where it might look like a phoenix company but still be totally lawful.

For example, a company might go belly up owing creditors $1 million. The liquidators, keen to sell the company and get some sort of return for creditors – no matter how small – settle on a sales price of $100,000. The directors of the old company buy it for $110,000, and creditors get 11 cents in the dollar. It is the highest offer. The liquidators are required by law to maximise returns for creditors so have a legal obligation to accept that price. 

That is legal. In the eyes of the law, the above example is not phoenix activity that involves intent to deliberately and systematically liquidate a company to avoid tax and other liabilities, such as employee entitlements then continue the operation through another entity.

Like many other criminal acts, intent is of key importance, says Bill Healey, chief executive of Printing Industries Association of Australia.

“We think it’s unacceptable,” Healey says. “We think any activity where people deliberately fail is inappropriate and we would also expect that such activity would be subjected to the full weight of the law. However, we are also aware that in some cases, businesses do go bad and businesses are returned by the receivers and the previous owners are in a position to purchase that business and when they do, that doesn’t of itself mean that the circumstances leading up to it have been inappropriate.”

The PIAA has been consulting with insolvency practitioners to try and work out a way to deal with the problem. 

Healey says: “Each case has to be examined on its merits. But I suspect there are some business operators who hide behind the wall to take advantage of not paying creditors. We believe that’s totally unacceptable,” he says. 

“We are encouraging liquidators to use all their power to look at how that can be prevented, either in terms of getting them to re-buy the business or exploring the circumstances that led up to the demise of the business.”

The government has now introduced laws to curb the illegal activity of phoenixing. First, it has changed the Income Tax Act so that in appropriate circumstances, directors can become personally liable for unpaid company tax debts and superannuation guarantees. If a tax debt is not remitted or paid within three months, the ATO can issue a notice. If the tax debt is more than three months overdue, then the director becomes personally liable. In other words, the ATO now has the power to seize the personal assets of a director of a company, which is more than three months behind in its superannuation guarantees or pay-as-you-go withholding tax.

Changes to the law

The government has also introduced the Corporations Amendment (Phoenixing and Other Measures) Act 2012, which came into effect on 1 July. This bill addresses the problem of employee entitlements in the wake of phoenix activity.

Here is how the legislation works. Some companies that are abandoned are just empty shells owing employees unpaid wages. The government has the General Employee Entitlements and Redundancy Scheme (GEERS) in place but GEERS only kicks in when a company has gone into liquidation. If directors have left the company floundering and have moved on to a new company, a mechanism would be needed to get that old company into liquidation so that GEERS could provide the employees with their entitlements. 

The new legislation changes that. It empowers ASIC to order the winding up of companies that directors abandon in the context of fraudulent phoenix activity. The government says this will allow workers linked to these shell companies to access their entitlements under GEERS.

In a consultation paper issued in July for public comment, ASIC proposed using a public interest test to determine whether a company should be wound up. “Our primary consideration will be whether ordering the winding up of the company would facilitate employee access to GEERS,” said ASIC. 

ASIC said issues to consider included whether the cost of liquidation would exceed the amount of employee entitlements as well as the number of employees affected by the company’s abandonment.

There have been other attempts to rein in phoenix activity in recent years. In 2010, the government increased the ATO’s powers, enabling it to demand “security deposits” for existing and future tax debts if it suspected the business was risk of becoming a phoenix.

In a report on phoenix activity released earlier this year, the Fair Work Ombudsman made a number of recommendations including educating the community about indicators of phoenix activity, encouraging more collaboration and sharing of information between ASIC, the ATO and Fair Work Ombudsman and publishing a register of repeat offenders, 

Same same but different?

Michael Forrest, a partner at law firm Middletons, says the government is also planning to bring in a Similar Names Bill, which imposes personal liability on directors for the debts of a company that has a similar name to a pre-liquidation name of a failed company.

He says it makes sense, simply because many phoenix companies have similar names to the old company. There’s a reason for this. “The reason it’s effective is because if you are doing this sort of phoenix behaviour, you often don’t want your employees or suppliers to appreciate the significance of it. You go in with a similar name so it looks like business as usual,” says Forrest.

“If the only things that have changed are a name and an ABN on some paperwork and if you’re not turning your mind to it as supplier or as an employee, you mightn’t even realise that you are now dealing with a different legal entity.

“If employees get switched on about this stuff, and suppliers get switched on about this sort of stuff then they might ask some awkward questions,” he adds.

Forrest says the nub of the problem is that sometimes companies can be restructured in a way that looks like illegal but isn’t. It might look like a phoenix company but legally, it’s kosher. 

He believes failed business people should be given a second chance.

“The tension with trying to legislate against these phoenix companies is you still need to recognise that we live in an entrepreneurial society and there needs to be regimes in place for people to chance their arm and fail and there needs to be a mechanism for that to be wrapped up in an orderly fashion,” Forrest says.

“That’s a very different thing from someone who intentionally sets up a company, incurs significant debts in that company with the plan of chalking up a bunch of debts, leaving those debts sitting behind in an empty shell and then just moving over to another company and doing it all over again.”

“There is nothing in the law that stops a current director putting a company into liquidation because it’s insolvent and then buying the assets or the business from the liquidator for a cheap price, provided they are the highest bidder.”

He explains that the law doesn’t have a problem if a company goes into an external administration and the former owners establish a new entity doing something very similar, having bought the assets and the business off the liquidator and paid the best price.

“That’s not a phoenix even though it achieved a similar thing, in that the same business is being effectively conducted by the same people but in a new entity.

Forrest says this is why governments have struggled to bring in laws to stop those phoenixes that intend to defraud creditors, employees and the ATO. 

“The challenge is how to legislate against that intention without inadvertently capturing entrepreneurs who are genuinely trying and failing. They tried and failed and we are an entrepreneurial society that wants to encourage people to continue trying,” he says.

“Unlike some areas of law where there is one nice little piece of legislation that just deals with it, the way phoenix companies operate requires some tweaks to the tax legislation, some tweaks to the corporations legislation, some tweaks to powers of the regulatory body.”

Robyn Erskine, the president of the Insolvency Practitioners Association and a partner at insolvency specialists Brooke Bird, says the law will always struggle to deal with phoenix companies. 

The law needs to clearly identify what a phoenix company is, says Erskine. It doesn’t do that at the moment. Until that is settled, regulators will find it difficult to bring them under control.

“Phoenix trading is a very emotive subject,” she says. “It’s very hard to stamp out and it is very hard to pin down what everybody means when they talk about phoenix trading.

“There are circumstances where people say a company is a phoenix when it is probably just someone trying to make a living. Then you’ve got the scoundrels who drive a truck through the law and are the true perpetrators of phoenix companies; they set out to deliberately crash and burn and they have a whole myriad of friends and relations who are prepared to step in as directors if they need to.

“What we would like to see is a common definition of a phoenix. It’s still unclear. Certainly the changes to the legislation that the government has introduced or is thinking of introducing will all assist and be deterrent but it won’t stop it.

“People need to understand that not every instance where the assets of the company are sold is a phoenix operation. That can be part of a restructure, allowing the company as a business to continue on, the employees to remain in work and the name is quite valuable moving forward. 

“To have clarity around what people mean by ‘phoenix’ will make it easier to identify, instead of a broad-brush approach,” says Erskine.

If a company has collapsed and burned its creditors, common sense says there should be a certain degree of self-governing within the market to ensure the phoenix doesn’t get supported. Suppliers are likely to be once bitten, twice shy. But one of the fundamental issues is that in this economic climate where top-line growth is important, essential suppliers like paper companies and trade binders may still work with phoenix printers. 

And while phoenixes may leave some customers high and dry, clever phoenix printers are more likely to look after certain clients more than others: they need them.

Erskine says that is a commercial business decision and judgement call. 

She says: “It’s a tough decision and it’s a perennial problem I hear with credit professionals. They will say ‘We don’t want to do business with this company because we know the director has a poor track record’. But their sales team is saying ‘But we can sell to them and you are trying to rain on our parade by not letting us sell to this particular person’. It then becomes a judgement made by the particular company about who they are going to listen to more. 

“I think they have a responsibility to themselves to do business with people they think are credit worthy. If they have concerns as to whether they think they are going to be paid, then they need to take that risk into consideration,” she says.

Erskine does not believe we need more legislation. The answer, she says, lies with the market and creditors taking more responsibility.

“I think the government is doing a lot in the area of phoenixes but the market itself can do a lot to protect itself from phoenix operations because they need to know who their customer is,” she says. 

“They do their credit checks, they know who is running these organisations, they have really good terms and conditions, they monitor accounts, they keep a tight rein on their debtors and make sure they’re regularly reviewed and not letting people get out to 90 days plus and not collected. 

“They are good business principles and if they follow those, then they don’t necessarily get caught a lot with phoenixes.”

Stop supply

Members of the PIAA board say phoenix companies would struggle if suppliers refused to deal with them.

The association’s national president, Susan Heaney, who is managing director of Gold Coast-based Heaneys Performers in Print, says suppliers have a responsibility not to do business with phoenix companies.

“They know they’re phoenix companies and they keep supplying them. Then they’re worried about not having enough sales. We’ve had some in Brisbane where they took over the assets before the company had even gone into liquidation, and companies still trade with them.

“There needs to be more moral commitment from people. I understand they’re caught between a rock and hard place and trying to hedge their bets and get their money but at what cost?”

Simon Doggett, managing director of paper supplier KW Doggett, says his company has a simple rule. “If Doggetts is involved with a failed entity as creditor, we would look long and hard as to whether we would support anything that arose out of the ashes.

“The general principle for us is that if a company fails, we would rather see the work move out to printers who do pay their bills and support the industry for the betterment.”

When companies go out of business, it is the market regulating itself. It is evolution. “The only way overcapacity will fix itself long term is with structural change. Structural change will only occur if the number of participants and amount of machinery downsizes as the industry restructures,” says Doggett.

He does not necessarily subscribe to the argument that phoenix companies save jobs. “There is also a loss that cannot be ignored when there are unsecured creditors and staff haven’t been paid their entitlements and the tax office is owed money.”

While phoenix companies are more prevalent in other industries, he believes the printing sector is particularly vulnerable. “Because our industry is going through such structural change, we’re seeing these sorts of practices.”

Head in the sand

Ray Keen, the former managing director of Printgraphics who is now semi-retired but still sits on the PIAA board, says suppliers are kidding themselves if they think they can do business with phoenix companies. He says his experience tells him otherwise. The bottom line, he says, is that there would be fewer phoenix companies if suppliers refused to deal with them.

“My personal opinion is that the suppliers to the printers, like the paper companies and outside suppliers like binders, should know if it’s a phoenix company or not. If they use their internal intelligence, like their sales reps, they would know the structure of the new company is a phoenix company and they shouldn’t do business with them,” Keen says.

“I remember a couple of years ago, someone did go broke on us and phoenixed and we still traded with them and they went broke again so we got doubly burned. If the paper companies want to get doubly burned, that’s up to them. I think they should be avoided at all costs by suppliers,” he adds. 

The problem is that the law will continue to struggle with phoenix companies. In a legal climate where restructurings of companies can be misconstrued as phoenix companies and where unscrupulous operators will exploit the legal uncertainties, lawmakers need to clarify exactly what they are.

Paul Richardson, managing director of Sydney-based commercial printer Lindsay Yates Group, puts it succinctly.

“Until there is a clear line in the sand, the phoenixes will always be there.” 

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