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Stay ahead of costly phoenix activity

The federal government has recently introduced a “new” hotline for anyone to report businesses that they believe are undertaking phoenix activity. This comes as a 2018 report from PricewaterhouseCoopers, funded by the government, revealed that the estimated annual cost of phoenix activity was now $5.13 billion dollars.

In 2012, the annual cost was between $1.8 billion and $3.2 billion and the Inter-Agency Phoenix Taskforce was established by the government. However, the numbers kept climbing to where they are today. According to the report, between the 2012 and 2016, more than a million Australian businesses ceased operating. Of those, 36,532 were business failures resulting in insolvency with an ex-administrator appointed.

This is a worrisome issue in Australia and the cost affects trade creditors the hardest, losing up to $3,171 million! The cost to employees through unpaid entitlements is up to $298 million. The government feels the loss too at $1,660 million from unpaid taxes and compliance costs.

So what is Phoenix Activitiy?

In a nutshell, phoenix activity is when directors realise that their business is going under and they jump their current ship and move on to another. The ATO defines Illegal phoenix activity as “the process of when a new company is created to continue the business of a company that has deliberately liquidated to avoid paying its debts, taxes, creditors, suppliers and employees.”

The CreditorWatch Small Business Risk Review for Q2 2018 shows that insolvencies have remained fairly steady since last year and bankruptcies saw a 7% increase nationwide. Most notably, cancelled unincorporated entities have increased by 60% from the previous year.  Patrick Coghlan, managing director of CreditorWatch and Lance Rubin, CFO of Sequel CFO, discussed the importance of due diligence, awareness and staying proactive in the recent SBRR Q2 2018 webinar. “Everyone thinks it won’t happen until it does,” they warned.

What are the warning signs?

How can you identify a struggling business that could lead to a Phoenix? There are a few red flags to look out for:

  • Poor credit behaviour
  • Poor cash flow
  • Poor payment performance
  • Trading under a different ABN or company name
  • Director steps down and a spouse or family member takes over
  • Director has been associated with bankruptcies, liquidations or de-registrations of other companies

Don’t wait until it’s too late, get help and act quickly 

It’s great that you can now dob in a suspected phoenix company via the government’s hotline. However, to be sure you aren’t waiting until it’s too late or reporting an innocent company, here are some ways you can use CreditorWatch to help:

  • Credit reports and customer monitoring
  • Register payment defaults to alert others to poor payment behaviour
  • See how companies are paying other company/suppliers using the payment predictor or DebtorLogic Plus
  • Monitor red flag activity with Bankruptcy Plus – see if there are cross-directorships, has the person been bankrupt in the past, name match and more!
  • Perform an annual DataWash to make sure your customers ABNs and other vital information are accurate
  • In the event of a liquidation, you’ll want to make sure your security interests are protected with PPSR

Speak to your account manager or visit www.creditorwatch.com.au today to learn more about our product suite and how they can help you perform due diligence!

For more information about warning signs, view out Road to Insolvency infographic

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