Phoenix Companies – Myths Exposed

I’m probably going to antagonise quite a few people with some of the things I say in this blog.  So let me start by saying that Phoenix Company activity is bad, it’s a problem and more needs to be done to stamp it out.  But here is the thing.  The number of Phoenix Companies each year and the cost to the community is nowhere near the amounts stated in accepted studies.  Further the existing laws aren’t too bad (if they were actually used) and hence the need for further legislation is minimal.   But there is a need for a lot more enforcement of existing laws. 

The Accepted wisdom on Phoenix Company statistics

Let me give the headline numbers that get regularly cited by Government Departments, Academics and the media:

• “The total impact of phoenix activity has been estimated to be $1.78-$3.19 billion per annum” – pwc Phoenix Activity Report June 2012.
• The (then) Assistant Treasurer Bill Shorten cited estimates in 2011, “based on ATO expertise, that there are 6,000 phoenix operators in Australia”.

I’ve looked into the backup for those numbers and I’d say the underlying assumptions just do not support either of the above conclusions.  Further they do not accord with what I see on the ground.  There are so many holes in the calculations I don’t know where to start.  So let me just say that the numbers are largely based on previous estimates done by Government Departments and/or extrapolations of various sources.  So they are current extrapolations based on …. previous estimates. The numbers are certainly not based on an extraction of specific information that would be available from Section 533 Reports lodged by liquidators.

Further, a particular inaccuracy is that I see the 6,000 figure quoted regularly as an annual number – I don’t know what it is (I’d be happy for the ATO to clarify) but it was not originally stated as an annual number.

Other statistics that paint a different picture of phoenix activity

I don’t know what the cost of phoenix company activity is nor the yearly number.  If you keep in mind that there are about 10,000 liquidations a year it’s possible to get some sense of how many of those involve phoenix activity by considering the following:

• Dunn and Bradstreet released data that showed in 2009/10 that the 10,200 liquidations for that year included Directors who had been directors in 1 or more previous liquidations in 29% of cases – that indicates to me an upper range of 2,900 (it must be materially less than that because not all repeat offenders are necessarily phoenix operators);
• In 2001/02, 1.6% of complaints (194 complaints) to the regulator related to phoenix activity – indicating a low range of 200 or so;
• In 2009, the ATO investigated 400 suspected cases of phoenix company – so that’s in the range;
• In the years ended June 2011 and 2012, the number of cases where the regulator successfully disqualified directors  (that is usually as a result of two-strikes or more as a director of a company that entered liquidation) were 72 and 84 respectively.

So note specifically the yearly number of actual complaints to the regulator (200 ish), the number of Director Disqualifications (under 100) and the number of investigations by the ATO (400 ish).  Nowhere near the headline number of 6,000!

So what? More director banning needed!

To some extent it doesn’t matter whether you accept the huge (and unrealistic) numbers quoted or the much lower numbers I think likely.  I can think of one thing that can happen easily: ban more directors.  The point is that phoenix activity, by definition, is undertaken by repeat offenders.  In 2012 there were 2,900 candidates for Director Banning and only 84 that came to fruition.

I deal regularly with the staff in the Director Banning section – they are all competent and diligent – but there ain’t enough of them!  More funding for that section please Minister.

So should directors be worried about Director Bannings and other actions?

Let me tell you what we see on the ground.  At Dissolve we receive a lot of calls from directors of insolvent companies.  Our estimate is that under 2% have actually been involved in phoenix activity.  But remember this, if you are a Director – there are legal and commercially acceptable ways to deal with insolvent companies – if you get good advice, you can restructure legally!  So for the 2% who go for a phoenix …. the liquidator and the regulator might just come and get you!

Lastly, and as alluded to at the start of this blog, I’ve also got strong views on the adequacy of existing Laws – but that is a rant for another day.