Illegal Phoenix Activity: How To Protect Your Business

When a business collapses only to reappear under a new name, it can raise serious red flags – especially if debts, taxes and employee entitlements have been left behind. This practice is known as phoenixing. While there are legitimate reasons for winding up and restructuring a business, illegal phoenix activity is a different story. It involves directors deliberately shutting down one company to avoid paying debts then starting a new entity to continue trading. The Australian Taxation Office (ATO) and regulators have a close focus on this practice, as it undermines fair competition and leaves creditors, staff and the community out of pocket. But what is phoenix activity and how can business owners identify and protect themselves from illegal operators?

The ATO and Australian Securities and Investments Commission (ASIC) are actively pursuing this issue. They are increasing scrutiny and enforcement actions against phoenix companies. As a business owner, knowing the signs of illegal phoenix activity can help you avoid potential issues that may leave you financially exposed.

What Is Phoenixing?

The term phoenixing comes from the mythical bird, known for rising from its ashes but what is a phoenix business?

Phoenixing a company means resurrecting, restructuring or renewing it and describes companies that are liquidated only to be reborn as new entities. It refers to a company that is deliberately shut down and replaced by a new one, often with the same directors, to continue operating without the burden of previous debts.

Not all phoenix activity is unlawful. In some cases, directors may legitimately close a failing business and start again, provided they meet their obligations to employees, creditors and the ATO. The problem arises when this process is used to deliberately avoid paying debts. Illegally phoenixing a business typically leaves creditors, suppliers, staff and the community at a loss, while the directors continue trading through a fresh company.

How Illegal Phoenix Activity Works in Practice

Illegal phoenixing usually follows a clear pattern. A company is deliberately wound up with outstanding debts to the ATO, suppliers or employees. Its assets may be transferred to a related entity at little or no cost, while the directors quickly establish a new business that looks much the same as the old one. From the outside, it can appear as though nothing has changed – same staff, same premises, sometimes even the same trading name – yet the original debts are left behind.

This practice is most often seen in industries where cash flow is tight and competition is fierce, such as construction, labour hire, transport and hospitality. It allows unscrupulous directors to gain an unfair advantage by cutting costs they legally owe, while their competitors are left carrying the full burden of tax, wages and supplier payments.

The fallout extends far beyond the immediate business relationships. Employees can lose unpaid wages and superannuation, creditors are left chasing debts that will never be recovered, and the broader economy suffers when millions in tax revenue is lost.

How Can You Spot Illegal Phoenixing?

There are some common tactics employed in a phoenix company that can be red flags to be aware of and help protect your business both financially and reputationally.

Red Flags to Watch For:

Regular creation of new companies for specific projects
Minor variations to a company name but with the same address and owners
Recurrent insolvency without genuine reasons
Appointing ‘dummy’ directors to protect actual players from legal consequences
Unexplained transfer of assets at undervalue
Patterns of director resignations before liquidation
Recent changes in management or legal structure
Business owners offering unusually low prices to win contracts

Records might be obscured or destroyed, making it difficult to trace financial histories. This deliberate concealment complicates investigations and recovery efforts. Affected parties, including the ATO, struggle to reclaim outstanding debts. This results in significant economic losses and undermines the integrity of honest businesses.

How Can Businesses Protect Themselves From Illegal Phoenix Activity?

Illegal phoenixing often leaves others to pick up the pieces, but there are steps that businesses can take to reduce their risk.

Do your due diligence – before entering into contracts, check the background of the company and its directors. ASIC registers and ABNs can provide useful insights as well as Directors Identification Numbers (DINs).
Look out for warning signs – frequent changes of company name, directors or ABN, unexplained asset transfers or a history of unpaid debts may indicate phoenix behaviour.
Get agreements in writing – Clear contracts that outline payment terms and responsibilities can help if disputes arise.
Monitor payments closely – Be cautious of customers who consistently delay or avoid paying invoices.
Amend credit terms – pursue outstanding debts and amend credit terms for any supplier you hold concerns about.
Implement strong internal controls – regular audits can help identify irregular or fraudulent activity among suppliers.
Seek advice early – If you suspect a business relationship could be at risk, professional advice can help you take protective measures.

For directors themselves, the best protection is to stay compliant. This means maintaining accurate records, lodging tax returns on time, paying employee entitlements and seeking professional help if financial difficulties emerge. Acting early often opens up more legitimate restructuring options and reduces the risk of breaching the law.

Engaging professional advisers can also help. They offer insights into potential risks and ensure you aren’t unwittingly involved with a phoenix company. Taking proactive measures can help avoid financial harm for your own business.

Professional Support Benefits:

Identify potential risks early
Ensure compliance with regulations
Receive up-to-date advice on best practices

The Impact of Illegal Phoenix Activity on Small Businesses and the Economy

Illegal phoenixing is a significant issue in Australia, costing the economy billions each year. It affects small business owners who may unknowingly engage with phoenix companies. In fact, according to the ATO illegal phoenix activity costs the economy in the region of $4.89 billion annually.

Because of the damage it causes, illegal phoenix activity is a top priority for regulators. The Australian Taxation Office (ATO), ASIC and other government agencies work together to detect and prosecute directors who attempt to walk away from their obligations.

Illegal phoenix activity distorts fair competition, allowing dishonest companies to undercut rivals who fulfil their obligations. For small businesses, the ripple effects can be devastating. Suppliers and contractors might face unpaid invoices, affecting their cash flow and sustainability. This financial strain can lead to broader economic issues, including job losses.

Key Differences Between Legal Restructuring and Illegal Phoenixing

It is important to understand that not every business that closes and starts again is acting illegally. Sometimes companies genuinely face financial difficulty and need to restructure to survive. If handled correctly, this process can be completely lawful and even in the best interests of creditors and employees.

The distinction lies in intent and compliance. Legal restructuring follows proper processes, such as voluntary administration or liquidation, with assets sold at fair value and proceeds distributed to creditors in line with the law. Employees are paid their entitlements and directors meet their reporting and tax obligations.

Illegal phoenixing, on the other hand, occurs when directors deliberately avoid these responsibilities. Assets may be transferred for less than market value or not recorded at all, creditors and staff are left unpaid, and the directors attempt to carry on trading as if nothing has happened.

By recognising the difference, business owners can ensure they restructure in a way that is both compliant and transparent, avoiding the serious penalties linked to illegal phoenix activity.

How MGI South Qld Can Help

Having a business partner you can trust in your corner can reduce stress and anxiety if you suspect you’re in business with phoenix operators. Our team can:

Help you with due diligence to minimise risks to your business
Provide timely advice on dealing with the situation if you suspect you’re dealing with illegal operators
Support directors in meeting their governance responsibilities
Provide advice on restructuring options that protect your business and meet your obligations
Assist with cash flow and tax planning to avoid financial stress

By working with us, you can get timely advice on the correct steps to take should you fall victim to scam operations. If you are concerned about potential exposure to phoenix activity – whether within your own company or through dealings with others – our advisors are here to help you take the right steps.

Key Takeaways for Small Business Owners

Understanding phoenix activity is crucial for protecting your business. Staying aware enables you to minimise the risks of doing business with illegal operators.

Here are important points to keep in mind: