Is phoenixing your company the best option? Beware of the hidden costs…

 

Are you considering phoenixing a company?

Because of the tough economic times in the past few years, there is a great deal of confusion amongst small and medium business owners about how best to deal with a struggling company.

One unfortunate consequence of this is the rise in phoenixing companies – both legally and illegally. But is it really the best option when the ATO or other creditors are knocking on your door?

There are hidden personal and financial costs that come with phoenixing your business.

Here we take a look at why phoenixing has become so popular and also consider a better alternative. An alternative which doesn’t carry the same potential to ruin you or your business down the track.

If you’re facing harsh decisions about the future of your company right now, read on as all is not lost!

Phoenixing a company: The rise in popularity

Phoenixing has become a rising phenomenon in recent years.

It now costs the Australian economy $3.2 billion annually. This includes $610 million for the tax office, $655 million for employees, and $1.93 billion for other hardworking business owners.

It has increased primarily because of two main reasons:

  1. A growing number of pre-insolvency advisers recommending them
  2. They’re seen as cheap

From our experience, small business owners are generally honourable people. Often coming from humble beginnings, they’ve worked their trade, saved some money, and built a business with a good reputation.

When times get tough, stress levels rise and good decision making can fall by the wayside. Small business owners, who are often also the directors of their company, face a difficult conflict of interests: acting in their company’s interests or in their own best interests.

Acting in a company’s interests means putting suppliers, employees and other creditors ahead of themselves.

But if doing a phoenix is presented as a viable option, it can seem like the only real way forward.

But it is far from the only option available.

In fact, doing a phoenix comes with many risks…

The hidden personal costs of phoenixing a company

Directors who seek our assistance often stress that “I would pay all my debts if I had the money”.

Doing a phoenix is rarely the preferred option. But, with so much talk about it, and liquidation often the only other option presented by pre-insolvency advisors, they think it’s the only way to save their business.

The first red flag here is that pre-insolvency advisers generally have limited or no qualifications-  and they are not subject to any regulation. In desperate situations, however, people often trust the words of people they would not normally trust.

The second red flag is the hidden costs of phoenixing

Phoenixing is nearly always proposed as being cheap (especially when done illegally): leave behind ATO and superannuation debts, let the Government pick up employee entitlements and navigate suppliers to try to re-emerge as a shiny new business.

However, the truth is that, besides the adviser recommending a phoenix, no one involved with it feels comfortable.

The accountant, lawyer, and particularly the directors feel nervous about the perception of being involved in a phoenix and are concerned that, at some future point, ASIC may prosecute them or a subsequently appointed liquidator will sue them.

The personal costs may not always seem apparent – but are very real. These include:

  • Ruined reputation of a business and its directors
  • Extra stress, particularly if doing an illegal phoenix
  • Impact on the directors’ families
  • Personal shame at not being able to look suppliers and employees in the eye
  • Increased ATO monitoring of any new company and a high risk of failure

There are also longer-term hidden financial costs of phoenixing a company, which include:

  • Loss of building licence (in Queensland) and other certifications and registrations
  • Bankruptcy under personal guarantees
  • Liquidators possibly pursuing legal claims against new companies and/or directors
  • Ongoing concern that ASIC may commence prosecution against the directors, which could result in fines and/or jail time
  • Non-payment of taxes by phoenix companies disadvantages other businesses by driving down profit margins in the industry

Is phoenixing coming to an end?

The Government has been active in bringing directors and advisers involved in phoenixing to account through:

  • An anti-phoenixing taskforce, which has conducted raids on businesses and advisers’ offices, and made prosecutions
  • Introducing laws that give creditors greater rights to replace a liquidator appointed by a director at any point throughout a liquidation, allowing the removal of a ‘friendly’ liquidator
  • Considering further strict measures to further clamp down on directors and advisors involved with illegal phoenix activity

You really need to think hard about phoenixing a company.

Besides, there are usually much better alternative options available…

Company turnaround: A viable alternative to phoenixing

The ‘rise’ of phoenixing has pointed out one thing: the need for better understanding of turnaround and restructuring options available for directors to rescue their businesses.

For a business with a turnover of less than $5 million, voluntary administration is unlikely to achieve its intended goals. The high cost, reputational damage and cancelled contracts often spell the end of its business.

But the options aren’t just liquidation, administration or phoenixing the company. Often, a turnaround or restructuring of the company can be put into action. And the Government is supporting such engagements by introducing ‘safe harbour’ laws from early 2018, protecting directors from insolvent trading laws if they attempt to carry out a genuine turnaround.

For directors who want to rescue their businesses, the assistance of qualified professionals is essential. They can help you with:

  • Diagnosing key problems and stabilising the business.
  • Developing and working through a turnaround plan: this may simply address key changes and cost-cutting, or include ongoing improvements and selling/closing parts of the business.
  • Engaging your bank and other creditors in the turnaround process.
  • Getting ATO and superannuation lodgements up to date and, if necessary, negotiating an affordable ATO payment arrangement.
  • Seeking additional finance to reduce/settle debts and boost cashflow as necessary.

Although it can be difficult to face up to your employees and creditors, you may be surprised at the support you’ll receive from them.

Remember: No one involved with your business wants to see it fail.

The best chance of success in troubled times…

If you are facing troubled times in your business, following are some basic recommendations to give your business the best chance of success:

  • Early action before problems worsen.
  • Keep accurate and up-to-date accounts, increase financial monitoring and keep in regular contact with your accountant or financial adviser.
  • Don’t ignore the ATO, superannuation obligations, the landlord or other creditors.
  • Don’t put in your own money or more finance without fixing the causes of the problems.
  • Seek professional advice.

If you’re facing tough decisions right now, get in touch to discuss your situation and to understand ALL the options available to you call 1300 4 CACTUS / 1300 4 222 887.

 

 

Posted on 13-09-17 in Business, Business insolvency, Business Solutions, Liquidation, Pre-Insolvency Advice.