With illegal phoenix activity estimated to cost businesses, employees, and the government up to $5 billion per annum, the industry has been on high alert, with the ATO and ASIC handed increased powers, including a new memorandum of understanding between the corporate regulator and the Department of Jobs and Small Business.
Speaking to Accountants Daily, Mackay Goodwin managing director Domenic Calabretta said he has seen an increase in awareness of phoenix activity in light of recent announcements by the government.
While supportive of measures against fraudulent behaviour, Mr Calabretta said the heightened awareness should not be confused with businesses wanting to successfully turnaround their operations.
“Some companies see their debts get out of hand and then, to avoid paying them, liquidate the business. When they transfer the assets of this liquidated business to a new company and continue to trade, they could be breaking the law,” said Mr Calabretta.
“It’s important for organisations looking to trade their way out of debt to understand what they can and can’t do. Not all phoenix activity is necessarily illegal, and transferring assets legally can be a useful way to restructure a failing business.
“The key here is that the company directors have taken all steps to pay its creditors as opposed to liquidating the company to avoid that responsibility. Fraudulent phoenix behaviour usually involves the directors transferring the company’s assets for little or no payment before the failing company is liquidated, so they can avoid paying creditors.”
Accordingly, Mr Calabretta believes accountants can help look out for the three most common mistakes that clients make across all industries.
These include not maintaining accurate records and up to date management accounts; high overhead costs that detract from an organisation’s sound business model; and poor cash flow management leading to high tax debt.
“Tax debt is a common catalyst of a failing business. The main reason is that failing businesses usually defers tax payment last and prioritise trade creditors, which can allow the business to continue trading. Unfortunately this strategy often fails, because once the tax debt is due and payable, the company is faced with unmanageable debt,” said Mr Calabretta.
Mr Calabretta also said accountants could help in preparing a company’s financials before seeking help from a insolvency practitioner, but warned against unlicensed operators in the space.
“The first step is to get the company's books in order as much as possible, so that an accurate position of the failing company can be ascertained. Once this is done, it is highly advisable to obtain independent advice from qualified insolvency practitioners,” he said.