Somewhere along the line this pretty, mythological tale has been commercially twisted to mean the practice of a company which deliberately liquidates to avoid paying creditors, taxes and employee entitlements. The perpetrators transfer the assets to a new entity, and continue operating the same or a similar business with the same ownership. Hence, “burning” one company to rise again and start anew with a “clean” if not fraudulent slate.
Illegal phoenix activity is a serious crime and can result in directors and secretaries being imprisoned.
In Australia, a report commissioned by the Fair Work Commission put the cost of this activity to the Australian economy at potentially more than $3 billion annually.
The report, Phoenix activity: sizing the problem and matching solutions, estimates that the annual cost of illegal phoenix activity is:
- up to $655 million for employees, in the form of unpaid wages and other entitlements
- up to $1.93 billion for businesses, as a result of phoenix companies not paying debts, and for goods and services that have been paid for but not provided, and
- up to $610 million for government revenue, mainly as a result of unpaid tax – but also due to payments made to employees under the General Employee Entitlements and Redundancy Scheme (GEERS) now the Fair Entitlement Guarantee (FEG).
Whilst there is no equivalent study in New Zealand, phoenix activity is recognised as a growing problem. In a recent interview on Radio New Zealand, Civil Contractors New Zealand’s Executive Officer, Malcolm Abernethy, described phoenix activity as something that has a significant effect on contractors.
“The margins at the present time are relatively low and it’s not until that last payment is made that a contractor would see any profit,” said Mr Abernathy.
“If there is a small profit margin, he won’t see that until that last payment. It affects the ability of the contracting company to invest in plant and also the capability of their workers in terms of training and so forth – they just can’t invest.”
Those affected by illegal phoenix activity include employees of the original failed company, other businesses that are owed money because they have supplied goods and services and statutory bodies like the Inland Revenue Department. This practice severely disadvantages creditors and gives these business operators an unfair competitive business advantage.
Not all company failures will involve illegal phoenix activity. Genuine company failures do occur. Where a business has been responsibly managed, but fails, that business may continue after liquidation by using another corporate entity without, necessarily, being involved in illegal phoenix activity.