In Australia and around the world, phoenix companies are a persistent problem that has proven to be a particular threat to small and medium sized enterprises. While the government has repeatedly taken steps to crack down on the issue, those new checks have done relatively little to slow phoenix operators. Small businesses, who typically find themselves most frequently victimised by non-paying phoenix companies, have little ability to fight back. The revenues lost to phoenixing can slow their growth, or cause more serious problems, which is bad for the Australian economy as a whole.
In a bid to help SMEs protect themselves, shadow Assistant Treasurer Andrew Leigh has proposed allowing the commissioner of tax to publicly name businesses who are known to act in bad faith toward their creditors. The ASBFEO, Kate Carnell, has come out in support of the measure, saying that it would be of particular help to vulnerable entities like subcontractors, who aren’t protected by the government’s fair entitlements guarantee.
Phoenixing is difficult to fight
The government hasn’t been ignoring the issue of phoenix companies by any means, with new legislation increasing liabilities for company directors, and empowering ASIC to better investigate and pursue offenders. Despite this phoenix activity is estimated to still cost the Australian economy up to a staggering $5.13 billion per year. In large part, this is because phoenix activity often appears very similar to regular business activity, and legislation designed to directly prevent it could also adversely impact businesses operating in good faith. After all, a regular insolvent business being liquidated might well be unable to pay all its debts for entirely mundane reasons. The affected suppliers can’t ultimately be protected from that risk.
Positively identifying and taking down phoenix operators is an involved and expensive process, and ASIC simply doesn’t have the resources to catch them all. This doesn’t mean, however, that the tax office can’t identify them with reasonable accuracy. Naming business directors who have a suspicious history with regard to paying debts to employees, suppliers, and creditors doesn’t necessarily accuse them of any crime requiring in depth investigation, but it is a simple means of providing potential victims with the information they need to avoid potentially dangerous relationships.
Making naming and shaming work
Simply naming every business director who has had the misfortune of losing their business would, of course, be incredibly harmful to businesses and entrepreneurship in general. Instead, the government can make use of previous anti-phoenixing measures to target likely offenders. This includes requiring business leaders to apply for a director identification number that would allow the government to more easily track individuals who are involved with multiple companies, and the relationships between those businesses.
Ideally, this would serve as a major deterrent to keep directors from engaging in phoenix activities in the first place. What it will be, if adopted, is at least one more disincentive to curb offenders. Ultimately, though, the government will need the direct help of SMEs to finally stop phoenix operators in Australia.
SMEs need to fight back
Businesses who suspect that one of their clients might be a phoenix operator often feel that they have no real recourse. While that might have approached the truth in many cases in the past, businesses now have a number of tools to help protect them.
Protecting your finances
Small businesses are the most popular victims of phoenix operators, because they often don’t have the resources or knowledge to defend themselves. A great way to nullify this disadvantage is to use invoice financing. Invoice financing is designed to ensure that businesses can get the funds they’re owed even if client payments are late, or if those payments simply aren’t due for some time yet. In this situation, it’s particularly relevant because the financial institution holding the invoice will go to collect payment from the client on your business’ behalf. Unlike most small businesses, that financial institution is fully aware of, and competent in the use of the legal tools it has to ensure proper payment.
Report suspected offenders
Earlier in 2018, the Australian government created a Phoenix Hotline for workers and businesses who suspect that they’re victims of a phoenix company. This will draw the attention of the ATO and ASIC. Considering the new tools that ASIC is soon likely to receive as from draft legislation submitted by Financial Services Minister Kelly O’Dwyer in August, the government will not only be able to prosecute offenders, but also to recover illegally obtained assets to make those missing payments.
Through the combined and sustained efforts of parliament, the ASBFEO, the ATO, ASIC, and victims, phoenix companies are losing, and will continue to lose ground in Australia. By tracking changes to laws regarding phoenix activity, and fighting back as well as they’re able, small businesses can limit and eventually eliminate the threat that phoenix companies pose.