Directors, beware the phoenix!
Australian authorities are cracking down on the practice of phoenixing by directors of businesses. Chris Sheedy examines the extent of the problem and how new laws will tackle it.
Several years ago, Kylie Hammond, CEO of Director Institute Next Generation Directors, was a creditor for a business that entered a particularly nefarious type of voluntary administration process known as ‘phoenixing’.
It is intended to deprive creditors of their pay-outs and often to sink tax debt, but also to siphon assets out of that company and into another very similar one, where it carries on the same type of business under a different name and with no debt.
They legally shifted the assets out of the vehicle and into another vehicle, and deprived all the creditors of nearly $2.5 million.
“Technically there is a legal way you can phoenix,” said Kylie. “The liquidators and the administrators will often, in a pre-voluntary administration situation, come in as insolvency and reconstruction experts. They will guide a company on how to navigate through the situation and they're not breaking any laws. But, of course, it's not so easy to be on the other side of the table when you’re owed money."
The term ‘phoenixing’ comes from the legendary bird that arises from the ashes. A new business that arises from the ashes of an old one still leaves behind a lot of damage, which authorities are attempting to prevent.
You give up because it's so complex to get your funds back. Most painfully, the directors all lived to fight another day.
“When I went through a phoenix myself, the company legally shifted the assets out of the vehicle and into another vehicle, and deprived all the creditors of nearly $2.5 million,” Kylie explained.
“Everybody was very, very upset, but the business did not break the law. We tracked down other creditors, got people together and got another administrator to give us an opinion on what had happened. But it was not easy and at the end of the day you give up because it's so complex to get your funds back. Most painfully, the directors all lived to fight another day, plus they all made money out of the transaction.”
The upcoming solution
Phoenix activities have been around in one form or another for a long time, said Kylie. They are more prevalent in specific types of industries, such as property development - although they can and have appeared in most industries.
The Australian Securities and Investments Commission (ASIC) is now beginning to take serious steps to prevent the practice as some directors become regular pests.
“ASIC has now begun to zero in on what it calls ‘serial phoenixes’,” explained Kylie. “These are people who are doing this on a regular basis and are sometimes up to their 20th phoenix activity. It's costing government, the regulatory body and creditors billions of dollars.”
You've just got to approach this whole sector with a degree of caution and do all of your checks and balances.
Company directors, under the tougher new laws, will be given unique Director Information Numbers which will make it easier for authorities to map the activities of individual directors and to recognise patterns. Those suspected of phoenixing could be forced to provide a security deposit which, in the case of a phoenixing action, would be used to help pay for debt recovery.
New offences will be introduced as well as new regulations which, for example, make it illegal for directors to resign and leave the company without a director. Facilitators of phoenixing activities will also be targeted by new laws and a task force comprised of staff from the Australian Taxation Office and other government bodies.
Immediate steps to tackle phoenixes
In the meantime, suggested Kylie, potential directors must be on top of their due diligence before accepting a place on a board alongside other directors, who may or may not have a questionable past.
“Before they join boards, directors must cross-check the other directors and find out what other boards they sit on, what other financial responsibilities they have across the market,” she said.
“Sometimes it's not that easy to get all that information together, so you have to apply some street smarts to your enquiries. You've just got to approach this whole sector with a degree of caution and do all of your checks and balances.
The key is to stay on the right side of the law and to be highly competent, and for the entire board to approach their roles with a high level of professionalism and ethics.”
About the author
Chris Sheedy is one of Australia’s busiest and most successful freelance writers. He has been published regularly in the Sydney Morning Herald, Virgin Australia Voyeur, The Australian Magazine, GQ, In The Black, Cadillac, Management Today, Men’s Fitness and countless other big-brand publications. He is frequently commissioned to carry out copywriting and corporate writing projects for organisations, including banks, universities, television networks, restaurant chains and major charities, through his business The Hard Word.