Ashes to ashes: How phoenix activity harms Australian SMEs

October 12th, 2017


Ensuring the ongoing success of small and medium sized enterprises (SMEs) is vital to the economic health of Australia. As of June 2016, over two million businesses were operating in Australia, with 97.5 per cent employing fewer than 20 workers, according to the Australian Bureau of Statistics. Despite such a massive sector of Australia's economy being represented by SMEs, entrepreneurs often face an uphill battle when it comes to maintaining stable cashflow.

Fortunately, SMEs are starting to receive the government attention they deserve. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) launched an inquiry into late payments back in March this year. Now, the Australian Securities and Investments Commission (ASIC) is taking action against another threat to SMEs - illegal phoenix activity.

What is phoenix activity?

Phoenix activity is the act of registering a new company to take over the business of a failed predecessor. This is not inherently illegal - a director may continue the business of a company after liquidation. Where phoenix activity becomes an issue, is when directors use this form of liquidation to commit fraud.

When a director transfers the assets of a failing company to a new, often similarly named, business for little or no value, red flags are raised. If this is done before liquidation, it's likely the assets have been moved so that they can't be sold off to pay creditors.

Fraudulent phoenix companies threaten to leave you in the ashes as they rise.
Fraudulent phoenix companies threaten to leave you in the ashes as they rise.

How does phoenix activity hurt my cashflow?

As an SME owner relying on payment for services rendered, phoenix activity has the potential to leave your company severely out of pocket. In the case of fraudulent phoenix activity, company directors will be avoiding paying for your services by deliberately sinking the company addressed in invoices.

If a client company were to commit illegal phoenix activity, it could deal massive damage to your cashflow.

A Xero report from earlier this year revealed that six in 10 small businesses would not survive more than three months if all invoices were not paid. If a client company representing a major portion of your business were to commit illegal phoenix activity, it could potentially deal massive damage to your cashflow.

How can I stop phoenix activity?

ASIC has made motions to disqualify any company directors found to be responsible for fraudulent phoenix activity. If you suspect a client company may be partaking in such illegal activity, ASIC advises that you report your suspicions to the relevant liquidator.

Unfortunately, it isn't ASIC's job to protect the individual interests of business owners - and so further defence falls on your shoulders. If you believe your business is entitled to assets held by a phoenix company, you'll need to seek independent legal advice.

Invoices that are paid late, or not at all, have a massive impact on SMEs in Australia. When your cashflow is suffering, drop us a line to work out the best finance solution to keep your SME afloat.

If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].