A breakdown of the anti-phoenixing legislation

This is an area that has received substantial interest from the legislators.

The initial approach was in 2012 with the passing of the Corporations Amendment (Similar Names) Act and the Corporations Amendment (Phoenixing and other Measures) Act 2012.

Both of the acts were effectively useless in terms of protecting the rights of creditors and were ultimately aimed at providing increased protection for the ATO.

The 2018 proposed amendments, which were referred to in the 2018-19 budget papers, are focused on stamping out fraudulent phoenixing activities. That is, intentionally fraudulent activity by directors, who set up a company, incur liabilities, including significant sums owing to the ATO, and when the heat builds up, simply jettison the company and carry on a similar business in another entity.

This activity is clearly fraudulent and there are already significant powers to both the ATO and ASIC to halt such criminal activity. The issue has not been lack of powers but lack of resources in order to investigate and take action.

Most phoenixing activity is not fraudulent. It arises much more from business operators who are either undercapitalised, have a deficient business model, draw too much out of the business or are just unsuccessful at business. The losses suffered by businesses from this non-fraudulent phoenixing activity far exceeds the losses from fraudulent activity.

A sensible plan in the 2018 bill is to bring in director identification numbers (DIN).

This one change will make it much more difficult to set up companies with straw-man directors.

In terms of impact on your clients, the changes will make no real difference. They just reinforce the fact that the best course of action is to simply not grant credit to a potential phoenix company.

There is no getting away from old fashioned credit checking. The first step is to provide your client with a proforma new customer form and to positively encourage them to use them for all new clients to whom they grant significant credit.

To save you reinventing the wheel, I suggest you go to our website and download forms that are suitable for a variety of businesses and practices. The forms are in word so may be easily adapted by your clients.

The information obtained will provide a source for credit checking and the few minutes spent in reference checking can save a great deal of heartache later.

As part of the credit process, always recommend to your clients that they obtain personal guarantees from directors (a simple guarantee document can be downloaded here).

The existing and proposed legislative changes will certainly protect the tax revenue but will do so at the expense of other creditors. Accordingly, don’t be lulled into a false sense of security that your clients will not suffer losses from phoenixing activity, due to the new legislation.

It goes without saying that if you act for a client who has a history of serial business failure, be very careful. Consider asking him to go to another accountant.

Roger Mendelson, chief executive, Prushka Fast Debt Recovery Pty Ltd