Here’s a familiar story. A rival competitor down the road keeps undercutting you. The prices he’s quoting are not just low, they’re below cost. There’s nothing you can do but watch as customers flock to this bargain basement printer and his promise of ridiculously low prices.
Then he goes belly up. Suppliers and customers alike get burned. “Great – one less price-cutter,” you think to yourself. Hopefully customers have learned the importance of paying a fair price for work.
But before you can even breathe a sigh of relief, he’s back, with a new company name, but the same old ways. Meet the phoenix – unfortunately you’ve probably been introduced to him already.
A 2005 Treasury report defined a phoenix company as one “where business operations are transferred from one company to another to avoid having to meet liabilities to unsecured creditors (particularly revenue authorities and employees)”.
It’s an expensive trend. In 1996, (the most recent year for which figures are available), phoenix companies were estimated to cost the economy $1.3bn a year.
In the printing industry, the flow-on effects can be just as damaging. Print buyers can become accustomed to the bargain basement pricing of phoenix companies and expect other printers to match them, forcing many printers in a ‘race to the bottom’.Suppliers who are left out of pocket by phoenix companies are often forced to raise their prices to recoup their losses, which again impacts the wider industry.
Government crackdown
The ALP put phoenix companies in their sights during the recent election campaign. In the lead-up to voting day, Gillard and co launched a “Protecting Workers’ Entitlements Package”, which proposed legislative reforms to target phoenix’ companies and give the Australian Securities and Investment Commission (ASIC) “stronger powers to place companies into liquidation when they have been abandoned by their directors”.
“The Gillard Labor Government will crack down on companies that undertake ‘phoenix’ company behaviour where a business closes down one day and opens up the next day with a different name to avoid paying its obligations,” the proposal stated.
“Directors will be made personally liable for the debts of companies that have deceptively similar names to failed businesses previously run by the same directors.”
It was a clear example of government policy aligning with the needs of the print industry. Earlier this year, ProPrint asked ‘What’s the best thing the government could do to help the industry?. The largest number, 50%, responded ‘Tighten insolvency laws to stop phoenix companies’.
But many in the industry seem to think there’s little that the current government, or indeed any government, can do to stop phoenixing activity.
“If it’s not illegal, then it’s very difficult to stamp out,” observed Warwick Hay, general manager of Webstar.
Indeed, ASIC told ProPrint there is “currently no legislative definition of what constitutes illegal phoenix activity and no specific phoenix trading offence exists under the Corporations Act”.
“It can be difficult to prosecute phoenix-style activities because there can be a fine line between setting up certain business structures for asset protection – which may be perfectly legal – and structuring businesses or companies in a way that are intended to take assets away and avoid liabilities to creditors, which can be illegal,” an ASIC spokeswoman said.
ASIC’s main recourse against phoenix companies is under the 2001 Corporations Act, which allows them to disqualify directors who have been officers of two or more failed companies.
The organisation also said that it has taken a proactive approach to the trend with initiatives such as the Assetless Administration Fund (AA Fund), which was established by the Australian Government in 2006. The fund is used to finance preliminary investigations and reports by liquidators into the failure of companies with few or no assets, where there is a reasonable prospect of enforcement action resulting from the investigation and report.
The initiative has reported some success. Over the 2009/10 financial year, ASIC banned 70 directors from managing companies. Of these 70 bannings, 42 were based on reports from liquidators who received Assetless Administration Funding.
Meanwhile, the ALP’s proposal adopted a tax-based approach to the problem. The party said it would examine an extension of the promoter penalty regime to include schemes to avoid the payment of a tax, as well as an extension of the director penalty regime to include PAYG(W), the Superannuation Guarantee and indirect taxes.
Taken to task
Lindsay Aitken, of business consultancy Lindsay R Aitken Business Reconstruction, told ProPrint that while there are laws in place to punish impropriety on the part of company directors, there is very little to stop them ‘returning to the scene of the crime’ by registering another company.
“It’s very difficult for the government or ASIC to prevent companies being formed in a democratic society. Certainly, where people have a history, the tax department are much more careful about registering ABNs. Perhaps ASIC should be equally concerned about a director who has a failing in their history. They could be a little more active in suspending directors or not registering businesses.” But Aitken is one of many who favours an industry solution to an industry problem. “The market has to do it for itself.”
Many believe the onus is on material and equipment suppliers to stop dealing with phoenix companies. In another ProPrint poll earlier this year, we asked ‘Do you think a government clampdown on fraudulent phoenixes would be effective?’. Nearly a third of respondents said the industry needed to be self-enforcing and that suppliers should stop supporting phoenixes.
Industry enforcement
It’s an approach favoured by printers such as Hay, who says he has started to avoid suppliers that contribute to the trend.
“From a printer’s point of view, if there is a common supplier that continues to support people that do phoenixes or organisations that do phoenixes, we don’t tend to deal with those suppliers,” he said.
But Hay was quick to point out that “while suppliers are often the ‘bad cops’ in this, they’re also the ones who get burnt”.
Over the past few years, many suppliers have been faced with unsecured debts numbering in the millions following the collapse of a printing company, and debts are rarely fully realised. But phoenix companies often offer a quick and easy source of business for suppliers who may still be reeling from their involvement in a delinquency and looking to recoup their loss.
“But it’s very tough for suppliers to know whether out of a phoenix there will be a good business. Just because the last business was a poor one, doesn’t mean the next one will be, so it’s tough for suppliers to know what to support,” said Hay.
Fujifilm Sericol credit manager Dave Hunt agreed the supplier can get “caught in the middle” when companies ‘phoenix’.
“I’d like to think we take a fairly hard stance with that kind of activity, but there would be very few suppliers in this industry that could hold their hand on their heart and say they’ve never supported a phoenixing company,” he said.
Hunt added that the downturn had exacerbated the problem. “The printing industry is in a difficult space. Suppliers are scrambling all over each other to maintain and grow their client base. Often that means they end up supporting an account that was formerly some sort of delinquency.”
But many feel that printing companies also have a responsibility to avoid the damage caused by phoenixing by maintaining “sustainable pricing”, a term which has also been gained a lot of currency over the last 18 months.
Andy Vels Jensen, managing director of Heidelberg Australia and New Zealand, recently argued at a public debate that there is still a place for competitive pricing in the industry.
“There’s nothing wrong with quoting a low price. There’s nothing wrong with undercutting a competitor, as long as you’re making money on it,” he said.
But Vels Jensen conceded that “too many printers are taking jobs just to keep their presses running”.
Of course, some companies re-emerge from insolvency that shouldn’t necessarily be considered phoenixes. Aitken emphasised that many printers are forced to return to printing as quickly as possible to support themselves after an insolvency.
“When someone goes broke, they often lose everything. So they’ve got to earn an income for their family in the best way they know how. Most people who operate small businesses are in a difficult situation because they don’t know anything else.”
Hunt agreed that there are sometimes extenuating circumstances which can validate supporting a phoenixing company. “There is a theory that ‘once a bankrupt, always a bankrupt’, that if you’re the kind of person who has taken risks, then you’ll keep on taking risks,” he said.
“But you need to look at each case on its own merits.”
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