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Phoenix Companies:
Discussion

Assistant Treasurer Nick Sherry has proposed that small businesses be obliged to lodge a security deposit with the ATO before conducting business in an attempt to limit phoenix companies and secure the ATO's revenue. The proposal has been widely criticised. Nonetheless something has to be done about people using phoenix company arrangements to rip off individuals and the community.

ICA has commented twice on the scourge of phoenix companies: the first about their use of illegal workers and, more recently, on the Sherry proposal itself and possible alternative strategies. Our most recent article has prompted a strong response from someone who's really hurting:

On 14 April 2010, Tom wrote:
    I am in the middle of a situation involving a phoenix company. The parent company in the UK went into liquidation leaving millions of pounds owing to contractors. Try Googling (names omitted) to see how this scumbag spends a fortune to maintain his lifestyle and leaves others out to dry. He did the same in Australia when the local company decided to evade its creditors.

    I have criticised ASIC for allowing an Australian company to trade with a foreign resident director but they say that this is permissible. When I advise them that the company previously trading as (name omitted) was trading as (name omitted) with the same address, same staff, same business etc the day after liquidating, they simply shrug and say they are powerless.

    I would suggest that the better solution is better regulation and amendments to trading legislation. A security deposit is not a bad idea per se, but this seems to me to only be a mechanism in the government's interest so that they obtain their tax. I would suggest, at a minimum, that companies must have resident Australian directors and that contracts can contain clauses to hold the directors liable. I realize that this flies in the face of limited liability but I think the public is fed up with the corporation scam.

    What should be done is change the Corporations Act. Seems that Sherry is fiddling while Rome burns---do something that really works rather than self-interested window dressing. The solution by Sherry is gutless. If he had some backbone, he would do something effective for all rather than just the government. It seems to me that too many politicians and their buddies would be exposed if limited liability was removed from corporation law.

    Alternatively, introduce changes to trading legislation to hold directors liable. I personally have a contract that includes a term that holds the directors personally liable for any debt the company fails to pay, but it is very difficult to obtain agreement to the term for obvious reasons. If this were enshrined in legislation people would think twice about becoming directors of companies and act more diligently in the discharge of their obligations. This may be a big ask but the current system is fundamentally and prejudicially flawed---so fix it.

On 18 April 2010, Jim wrote:
    Okay phoenix schemes may be a problem and the black-list idea has merit.

    To me however the far bigger problem are the Maybe-Never schemes of often ASX listed companies that fail to pay bills within say 30 days, or even 90 days or more. The know that they have the contractor by the short and curlies because if the contractor tries to get their money the only way possible (taking action to put them into receivership) they will not get any future work. The contractor is also normally reluctant to cease working if a few dribs and drabs of payment come through as they would otherwise have to lay off good employees.

    So the end result is something between a form of slavery and an interest free loan system for the companies that use the scheme. The unethical companies also happily sign off on the Section 347A solvency resolution and get away with it. They normally seem to do this by a combination delaying entering into invoices their accounting systems and not paying bills in the lead up to financial reporting periods. And all the normal ploys we all know about to fob us off.

    A great idea would be to have an ICA or government website where unethical payers could be chronicled and others warned to avoid them. Or perhaps a campaign to get better legislation. However all the complex red tape we currently have doesn't seem to make any difference apart from waste our time and employ a few public servants at tax-payers expense.

    With finance still very tight (despite all the positive propoganda) I'm sure that this issue will be a strong one with many contractors and suppliers throughout the country.

[If you would like to contribute to the discussion, please e-mail your thoughts to us at: discussarticle@contractworld.com.au.]