When performing a business credit check, it is important to understand the concept of cross directorships. This is where some directors you work with may own or have previously owned multiple companies, and potentially increasing their credit risk.
Many creditors can remain unaware of a director’s history, either through naivety on their part or dishonesty from the director in question.
This puts your business at risk of being left high and dry chasing a director whose credit report shows they won’t be able to repay their dues.
CreditorWatch’s credit reports flag when directors have been involved with previously failed or failing companies, as well as other activity that could potentially put your business at risk.
What is phoenix activity?
Phoenixing occurs when a company is liquidated, wound up, or files for bankruptcy or insolvency to avoid paying any outstanding debts and the directors then ‘rise from the ashes’ to form a new company and continue the same business activities without the associated debt.
This harms employees and creditors alike, as they’re left out of pocket, potentially being owed wages and entitlements.
In June 2020, the Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019 passed through the Federal Parliament, stating that all company directors were to be assigned a unique Director Identification Number (DIN).
This DIN now stays with each director for life and keeps track of all business activities – suspicious or otherwise – giving regulators and creditors an overview of their credit history.
Since the Bill passed, illegal phoenix activity is much more difficult to pull off. But this doesn’t mean creditors should become complacent.
The risks of cross directorships
While not all cross-directorships are malicious, it pays to know what you could be getting into and what you can avoid by taking extra care.
We have previously revealed a few facts about the risks of cross directorships:
- A director with a previous payment default is 5x as likely to do so again.
- A director with a court action is 2x more likely to receive another.
- A director with a failed business is 2x as likely to fail in the future.
Some directors try to avoid detection by changing names or personal addresses, but such types are far less likely to go undetected these days with tools like CreditorWatch available to businesses and stricter laws coming into play.
Director due diligence is crucial to business credit risk management
Not all cross directors were created equal. Some are very talented businesspeople and are able to successfully run multiple businesses.
So how can you know who to trust in this dog-eat-dog business landscape?
Our credit reports have several key features. They reveal any adverse information relating to court actions, ATO tax defaults, payment defaults, ASIC actions and administration appointments. They also identify cross directorships and whether they will pose a problem to your partnership with a company. It provides detailed information on officeholders, addresses, shareholder details, business lifespan, company status and previous credit enquiries. And, more broadly, it identifies risky debtors using extensive and timely data sourced from public, private and in-house databases.
You can also save further time on your director due diligence as this tool is integrated with the award-winning InfoTrack search portal. You’ll have the power to access more than 4,500 different searches and services on a pay-per-click basis, only paying for what you need to know.
What to do about cross directorships
It’s important to remember that not all cross directors are problematic. However, if you become aware of illegal phoenix activity, you can report it anonymously to the Australian Taxation Office.
If we detect any suspicious behaviour from an entity that you’re currently associated with, our monitoring and alerts tool will automatically send you an email so you can take action immediately.
Avoid dodgy dealings and stay on the path to success using CreditorWatch’s suite of tools to perform a business credit check Australia-wide.
Don’t take any risks when it comes to the reliability of your debtors. We can help you to understand any risks and negotiate them before they become a major issue.
Get in contact with us today for a free demo of our credit reports.
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