Illegal Phoenixing in the Building & Construction Industry

One thing we have seen a rise of in Australia as of late is “phoenixing” in the building and construction industry. This presents risk to business owners, regulators, and can even trickle down to employees in the industry.

What is phoenixing?

What is phoenixing, you may ask? If you are fortunate enough to not have come by the term already, phoenixing is the act of taking steps to deliberately and purposefully liquidate a company, in order to avoid the debts and liabilities it owes. That same business is then transferred to another company, “rising from the ashes” to continue the so-thought abandoned business, having successfully dodged its debts, and leaving creditors with nothing to be paid by.

Legal or illegal?

Illegal phoenixing is not to be confused with a company restructure (which is similar, but not illegal). The key difference is the intentions of the director – whether they are dishonest and reckless, or genuine. A director acting honestly and responsibly will have their new company pay market value for the old company, thus their creditors will not be disadvantaged as they are when a company is bought. The pain from illegal phoenixing is felt widely – by employees and creditors, all the way to taxpayers, with the government forced to pick up the slack left by phoenixing employers.

What’s being done about this?

Thankfully, the NSW Government has now taken a stance against these companies, and has brought into place an amendment to the Home Building Act I989 (Cth), via the Building Legislation Amendment Bill. This was following the 2018 Economic Impacts of Potential Illegal Phoenix Activity Report by PwC, which found illegal phoenixing to cost employees up to $298 million in unpaid entitlements, and the government another $1,660 million in unpaid taxes, adding to a total somewhere between $2.85 and $5.13 billion of direct impact. Reckless, phoenixing company directors breach their directors duties and can now face up to 15 years prison and large fines – which also extends too to anyone advising, aiding or abetting the process.

How can I protect myself?

With this billion-dollar impact, it is vital that people stay vigilant to the tricks of phoenix enablers. If you are a director, be wary of any financial advisors or valuers that seem to recommend anything sounding like illegal phoenixing, such as suggesting you take part in less than market value sales to a similar company, or appoint a liquidator who is ‘friendly’ in their investigation of the company. If you are a contractor, employee or creditor, look out for tell-tale signs, including talk of changing ACN while the company has a long list of unpaid debts, or multiple companies with similar names.

If you see or suspect phoenix activity, we can assist you with determining if this may be the case, and provide you with advice to limit any adverse effects you may be facing. For more information and to discuss your business matters, please contact Jenkins Legal & Advisory on (02) 4929 2000 or email office@jenkinslegal.com.au.

This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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