Nothing provokes such an intense reaction in the printing industry as the phoenix. The merest hint of a company using the liquidation process to avoid paying its debts and carry on as normal is enough to raise the ire of honest, hardworking printers. And why not? It’s an insidious and destructive practice as well as being illegal. But if it’s really so bad, why isn’t more action taken to stamp it out? Simon Enticknap looks at recent attempts to fight the phoenix.
It’s become a regular feature of reporting on the printing industry. Every so often, like the proverbial bad penny, a story emerges of a suspected ‘phoenix’ company rising from the ashes of its own combustion. This is the practice whereby a company goes into liquidation and then miraculously re-appears, often with a similar or the same trading name, perhaps even in the same premises with the same equipment, staff and customers. All that has changed in the process of re-birth is that the new company has managed to slough off all the bad debt associated with the old company, leaving creditors with nothing to grasp but thin air.
It’s a practice that generates intense ire within the industry, not surprisingly given the pain that a single phoenix can inflict on many people in different areas. The creditors of the old company, typically the paper companies and trade printers, are obviously the biggest losers. Not only do they face the prospect of having to write off their debts with the old company, they are also often placed in the invidious position of having to continue trading with the new entity in the hope of clawing back some of their losses. Other creditors may include the staff of the old company who face the prospect of losing some if not all of their entitlements.
Phoenix companies are bad for the rest of the industry too. Their re-emergence means that instead of benefiting from the demise of a loss-making competitor – one which may well have been undercutting the market – rival printers now face the prospect of competing with a new player unencumbered by debt and free to pursue its previous bad habits.
Finally, phoenixing is bad for the rest of us as it has a direct impact on government revenues and spending. Typically in these circumstances, the Australian Tax Office is one of the biggest creditors of the defunct company due to the non-payment of PAYG and superannuation guarantee remittances. The Australian Tax Office (ATO) estimates that phoenixing activity costs the government about $600 million each year in lost revenue. In addition, the government may face the prospect of having to fund workers’ lost entitlements through the Fair Entitlements Guarantee (FEG) scheme which covers unpaid wages and leave entitlements, placing an additional strain on the public purse. In the first half of 2013, Printing Industries estimates that $25 million was paid out in FEG entitlements for the printing industry alone.
It’s a big bird
So how big a problem are phoenix companies? A report put out last year by the Fair Work Ombudsman estimated that the total impact of phoenixing on the Australian economy was between $1.78 billion and $3.19 billion per annum. The ATO estimates that there are about 6,000 phoenix companies in Australia.
Given the scale of the problem, any reasonable person might expect that the authorities would be doing everything within their powers to crack down on the practice. Certainly, in the past, there have been successful prosecutions by the Australian Securities and Investments Commission (ASIC) against blatant offenders. In one case in 2009, for instance, directors of eight separate companies were banned from managing corporations for two years each for breaches of their duties in relation to phoenixing. Interestingly, in this case, the solicitor who advised the directors was also banned for six years.
ASIC also has the power to disqualify individuals who have been directors of at least two failed companies over a period of seven years in which the liquidator has made an adverse report, such as for misuse of company assets, breaches of duty or where the unsecured creditors receive less than 50 cents in the dollar. According to its annual report, ASIC disqualified 57 directors from managing corporations in 2012–13.
While this demonstrates that individuals can be successfully targeted for engaging in phoenix-like activity, it’s also clear that this is still just scratching the surface and that the practice remains widespread. Business groups in particular have been vocal in their calls for governments to do more to tackle the problem.
In response, the previous Federal Government introduced legislation which it claimed was targeted at phoenix activity although, rather typically, the expectation wasn’t matched by the reality. The first bill, the Corporations Amendment (Phoenixing and Other Measures) Bill 2012, basically gave ASIC the power to wind up dormant or abandoned companies. This addresses the situation whereby a company is not placed into liquidation but simply abandoned so that any creditors seeking redress have to apply to the courts to have the company wound up. If the company has already been deregistered rather than wound up, the creditors must first apply for it to be re-registered and then placed into liquidation – a convoluted and expensive process.
Giving ASIC the power to wind up these dormant companies is therefore beneficial for creditors, particularly for any staff who have been left in limbo by the abandoned company as liquidation automatically triggers access to FEG payments. The liquidation process may also uncover evidence of phoenix activity although, despite its title, the legislation itself does not directly address such issues.
Ironically for the print industry, it was this Bill which also authorised the publication of all insolvency notices on a single website, thereby eliminating approximately 53,000 newspaper advertisements each year and cutting an estimated $15 million in ad spending.
Defining the problem
The second piece of legislation, the Corporations Amendment (Similar Names) Bill 2012, was aimed at removing the limited liability protection for directors who start up a new company using a similar name to a company which has previously gone into liquidation. This mirrors similar legislation in New Zealand and UK and, again, it aims to address one specific aspect of phoenixing, namely the repeated misuse of limited liability protection to avoid meeting debt obligations.
Again, this Bill sought to discourage phoenix activity without explicitly defining and targeting it. And, as such, it can be easily circumvented. There’s nothing to stop a phoenix company director from using an entirely different company name to maintain their exemption from personal liability. (Besides, this is all rather moot now as the Bill still languishes in Parliament with no sign of progress.)
These wishy-washy attempts to address the problem serve to highlight one of the key obstacles in combating phoenix activity, namely defining exactly what it is and how it differs from honest business practice. After all, it is in the nature of business for people to go bankrupt, possibly for reasons beyond their control or just plain bad luck. In such circumstances, no red-blooded entrepreneur would resent somebody having another go, and it makes sense that such people might start another company in the same industry using the skills they had already acquired. And if the new company comprises Fred Bloggs and his son, it might be entirely appropriate to call it Fred Bloggs & Son even if this is the same name as the old company. There’s nothing intrinsically wrong in doing any of these things.
The problem arises when these legitimate practices are used knowingly to avoid meeting existing debt obligations. Most accepted definitions of phoenixing include some element of intentionality or deliberate evasion. But, as any lawyer will tell you, proving intent can be devilishly tricky.
Law enforcement
The other point raised during recent attempts to combat phoenixing is that substantial penalties already exist for company directors who engage in such fraudulent activity. For instance, sections 180-184 of the Corporations Act which cover directors’ duties have been used previously to prosecute directors who engage in phoenix activity. Directors who breech their duties recklessly or with intentional dishonesty can face fines of up to$220,000, five years imprisonment or both. The fact that people have been successfully prosecuted under these provisions – and jailed – should act as a sufficient deterrent for anybody considering this course of action.
There are also provisions in existing taxation legislation to prosecute directors who use phoenixing to avoid their tax obligations. Earlier this year, for instance, the ATO executed search warrants at the premises of 80 labour hire companies in South Australia suspected of using phoenixing to avoid paying accumulated tax debts.
The problem then is not a lack of legislation but rather enforcing what already exists. It’s significant that the Printing Industries ‘call to action’ on phoenixing for the new Federal government highlights the need to “ensure business operators understand and meet their obligations as outlined in the General Duties of Directors Section of the Corporations Act” and “enforce more vigorously laws relating to insolvent trading”. It also calls on ASIC to “vigorously apply” the banning policy in relation to company directors involved in multiple liquidations in the printing industry.
Perhaps in response to these calls for action, ASIC recently announced that it was launching a new crackdown on putative phoenixers with a surveillance program of 1,400 suspect companies, mainly in the building and construction, labour hire, transport, and security and cleaning industries.
Greg Tanzer, ASIC commissioner, said in a press release: “We are looking at failed companies, mostly within the small business sector, from July 2011 onwards where there have been allegations of illegal phoenixing.
“To date, we’ve identified a target group of 1,400 companies. We’re now paying special attention to approximately 2,500 individuals who were directors at the time these companies failed or ceased being directors shortly before the companies were wound up.
“In some cases, company failures are nothing more than bad luck. But there are some people who deliberately walk away without any intention of meeting liabilities and establish a new company to conduct the same business. We are committed to weeding out these individuals.”
It will be interesting to see what, if anything, results from this crackdown. The phoenix is a tough old bird, highly adaptable to new environments and, by it’s very nature, almost impossible to kill. Tracking it down and eliminating it wherever it raises its ugly head is a task that is likely to continue for some time yet.