Don’t get ripped off by Phoenix Companies!

There has been a recent crackdown on the construction industry relating to ‘phoenix companies’. A phoenix company relates to companies who suddenly shutdown their company with the intent to evade outstanding debts and then start trading again under a new company. The new company is often operated under the same director/owner, carrying out similar works, although, has opened the new company to avoid the responsibility of meeting their liabilities. The crackdown has primarily been focused around the use of fraudulent statutory declarations, whereby phoenix operators submit as evidence that subcontracts have been paid in order to receive payment from the principal. The Australia Securities and Investments Commission (ASIC) are aiming to combat the illegal activity by removing directors who have been involved in two or more failed companies.

Common indicators

ASIC has proposed “common indicators” that suggest that a company may be engaging in illegal phoenix activity. The main indicators are as follows:

–        The company fails and is unable to pay its debts

–        Directors act in a manner which intentionally denies unsecured creditors equal access to the company’s assets in order to meet unpaid debts

–        Soon after the failure of the initial company (usually within 12 months), a new company commences using some or all of the assets of the former business, and is controlled by parties related to either the management of directors of the previous entity.

How to protect your company from phoenix operators

For subcontractors, you need to have proper payment terms in your contracts, properly use the Building and Construction Industry Security of Payment legislation, as well as rely on the Personal Properties Securities Act 2009 (Cth). This will assist with protecting your businesses interests against phoenix companies and their directors.

Our Solicitors at CTI Lawyers will be able to assist you with drafting a contract for your business to ensure that it has adequate payment terms. We can also assist you with registering your security interests on the Personal Property Securities Register. You can contact CTI Lawyers on (02) 9744 1099 or email your enquiry to law.clerk@neca.asn.au.