CreditorWatch Due Diligence Risk Management
5 mins read

The role of due diligence in combating illegal phoenixing activity

It’s an occurrence seen all too frequently within wholesale trade and retail in Australia. A trading partner with high levels of outstanding debt goes insolvent, only then to re-emerge under a new name with the slate somehow miraculously wiped clean. If you’re a creditor for the old company, you may never be compensated, and if you’re commencing trading with the new one, you may not be aware of the increased credit risk posed by those operators. When combating illegal phoenixing activity, doing proper due diligence is the only way to protect your business.

Understanding illegal phoenixing activity

Let’s be clear – strictly speaking, it’s entirely legal within Australia for the director of a company that becomes insolvent to start a new enterprise. What matters is the nature of the fledgling business. Instances of illegal phoenixing activity occur when that new company is formed with the intent of avoiding the debt obligations of the liquidated or abandoned one. Typically, the new shopfront offers exactly the same, or similar, products and services as the old – rendering it different in name only.

The sinister side of business resurrection

The sinister element is that with a new business comes liabilities. The operator is essentially seeking to erase their outstanding credit, establish a fresh retail outfit out of the ashes of the previous business to trade under, and continue operating as though it’s business-as-usual. Meanwhile, the creditors of the now-insolvent company are left out-of-pocket and at risk of default themselves. The bankruptcy or liquidation proceedings are contained to the assets and holdings of the abandoned business, meaning they may never recover any credit owed.

The role of due diligence in combatting illegal phoenixing activity

Company directors’ due diligence is the key strategy your business requires to manoeuvre around such dangerous operators within these high-risk sectors, and regulatory assistance is available. The Australian Taxation Office (ATO) has taken steps to reduce the incidence of illegal phoenix activity through the implementation of Director Identification Number (DIN) requirements. 

Each and every company director in Australia must apply for a unique 15-digit DIN that permanently identifies them and their associated entities. They only ever need to apply once, as that number will stay in reference to them for life, throughout any changes in company, role, name, address or otherwise. 

While the implementation of the DIN system is helpful, it is not a full risk-mitigation strategy that your business can rely upon. There needs to be the proper director due diligence tools available to your business to gather all of the available identifying information and use it to thoroughly assess the integrity of those you’re doing business with. Some operators engaging in illegal phoenixing activity may take steps to obscure their past involvements or any adverse events associated with them. If you’re trading with them unawares, you may be exposing your business to significant credit risk or potential malpractice.

The power of director due diligence

Knowledge of those you’re doing business with is power, especially as the value of the trading relationship grows. High-value or volume wholesale trading partners create cash flow dependency for your business, so you need to have a grasp of all of the available details to fully inform all contract or trading decisions.

Accessing director information with CreditorWatch

The gold standard in director due diligence for wholesale and retail businesses can be found within the suite of resources and tools from CreditorWatch, all designed to empower your business and its decision-making. This critical verification process must never be overlooked for either existing trading partners or those coming on board, as it would be neglecting the duty of care to your business. Exposure to potentially fraudulent or bad-faith dealers can be catastrophic, and the director of a failed business is two times more likely to fail again in future undertakings. Ideally, each director of a partner business ought to sign a guarantee making them liable for any debts in the event of non-payment. 

From within the credit reporting suite from CreditorWatch, director details can be verified not only according to their DIN, but also the vast quantities of business data available exclusively to CreditorWatch customers. The information provided is extensive, detailing previous office holdings, court actions, adverse ASIC events, payment defaults, mercantile enquiries, and more. This additional detail elevates your capacity to avoid risky individuals. For example, a director with a payment default against them may be up to five times more likely to default in future, and therefore may be better avoided. You may never have known, without engaging fully in the director due diligence process.

Identifying red flags and making informed decisions

Any adverse cross-directorships can also be identified from within the credit reporting platform. While it is not illegal to be a director of multiple companies at once, it can definitely raise concerns of conflicts of interest or malpractice. At the very least, it may suggest that the individual in question has an excessive workload by way of their time and energy obligations to each company. As these red flags are raised, with the assistance of CreditorWatch’s automated 24/7 alerts and monitoring capabilities, you can make an informed decision and act promptly and decisively. 

Securing your assets: Registration of security interests

Should any goods be transacted under a hire-purchase agreement, or similar, then additionally you will need to register your security interests on the Personal Property Securities Register (PPSR). In the event of their insolvency, you’ll be elevated up the hierarchy of creditors by the liquidator or administrator as a secured creditor. Failure could result in your claim being lumped in with that of every other debtor, reducing the likelihood of repossession or compensation substantially. 

Simplified protection with PPSRLogic

This often confusing process for wholesale and retail businesses can be made easy through the use of PPSRLogic, powered by CreditorWatch. The registration of any security interests can be completed on one page, with one click, existing registrations can easily be imported, and all can henceforth be updated, renewed or amended from within the intuitive platform. For any retail business seeking to protect its goods paid through credit arrangements from insolvent loanees, it is the market-leading tool to protect your assets and cash flow. 

CreditorWatch: Your comprehensive solution

CreditorWatch offers the comprehensive tools required to identify and verify those you’re doing business with, assess their creditworthiness, empower your trading decisions, and reduce your risk exposure to dodgy operators. 

For more information, download our full report on illegal phoenix activity and how to combat it.

due diligence fraud phoenix activity phoenixing risk management
Sarah Oliver
Marketing Coordinator
Sarah joined the CreditorWatch marketing team in May 2023, bringing with her a strong passion for helping businesses and individuals navigate the intricate world of credit through strategic marketing and effective communication channels.
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