By Liyan Tay and Matthew Varendorff
The economic cost of phoenix activity has been very harmful to the economy and poses a significant problem for those operating in business whether as employees, suppliers or customers. In the recent Budget, the government has taken measures to deter and disrupt the behaviour of phoenix operators.
Whilst there is no guaranteed method of completely removing the risk of being impacted by the effects of illegal phoenix activity, businesses should undertake steps to limit the impacts of potential illegal phoenix activity and the financial impact of the insolvency of an employer, customer or client.
Below are some inquiries that a business operator should undertake on their own in order to minimise the risk of trading with a potential phoenix operator.
- Get to know your customer prior to entering into trading terms (e.g. length of prior trading history, disputes with former suppliers, key personnel within the company)
- Be aware and comfortable of the specific entity with whom you are entering into trading terms
- Conduct third party reference checks and make your own inquiries of other suppliers who have dealt with the customer
- Use all available tools to obtain information on your customer (e.g. court searches to identify any potential disputes, legal or debt recovery proceedings and searches of the ASIC Published Notices, company and director credit checks)
- Conduct inquiries into key company personnel (e.g. directors, shareholders, and key management staff). Check if there is a history of involvement with companies that have been subject to formal insolvency appointments
- Review your current trading terms and conditions and check if they provide you with adequate protection and reflect the current industry legislation
- Consider whether to obtain a director’s Personal Guarantee
- Ensure security interests are properly registered on the Personal Property Securities Register (if applicable)
- Carefully consider the extent of credit you are willing to provide and whether this sits within your company’s risk profile
- Consider if trade credit insurance maybe beneficial in reducing a potential risk of a customer’s insolvency
- Be wary of changes in a company’s structure (e.g. change in directors, shareholders, company name) which can be identified from ASIC’s public database
- Be vigilant of change to trading terms, changes to entity details or new bank account details (particularly where mutual trading terms exist) for no apparent reason
- If a customer has sold their business, ensure you are comfortable in continuing to trade on the terms previously entered into with the former business owner
Furthermore, superannuation funds, trade unions and credit reporting agencies are also well placed to contribute to the detection of potential illegal phoenix activity. Superannuation funds may notice that a particular employer ceased remitting contributions, trade unions may notice non–payment of wages though member complaints or maybe aware of flagrant directors who keep resurfacing and credit reporting agencies in their nature of collecting credit-related information may notice suspicious credit activity.
Please do not substitute the above enquiries in lieu of obtaining independent advice on risk management to suit your particular business requirements.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.