Killing Phoenix Companies

Four Strikes And You’re Out

ASIC are exploring a four-strikes-and-you’re-out rule to combat Phoenix companies.

Under the current law, the Australian Securities and Investment Commission can seek to ban a director who has been on the board of two or more failed companies and a liquidator has lodged a report regarding the corporation’s inability to pay its debts. A notice is served and the person then has the opportunity to demonstrate why they should not be disqualified.

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Introducing automatic disqualification provisions to include directors involved in four or more company failures where a section 533(1) liquidator report has been lodged for each of those companies would remove those directors without having to go through the disqualification process.

Directors so disqualified would have a right to apply to the court if they sought to continue, or wished to commence managing a company during the disqualification period.

ASIC’s senior executive leader of real economy, Kathrine Morgan-Wicks, told BusinessDay that the regulator was talking to Treasury about further law reform to enable it to automatically ban a director rather than wait to receive a report from a liquidator. It is then up to the government to act on it.

This is long overdue. It’s the bane of small and medium businesses in Australia that just about any small company out there could do this to you. Worse still, there are persistent rumours out there that there are whole organisations that work off this principle whereby they form a company for one event – like the Pope visiting or the Olympics – sell as much merchandise to suit the event while racking up debt and then bankrupting the vehicle and walking away without paying.

There are terrible stories about phoenix-ing companies in the wake of the Sydney Olympics coming to an end. Nobody talked about those at the time the Sydney Olympics were lauded as a great success. I have to tell you some of these first hand accounts I have heard has browned me off small companies in Australia. You might hate the big guys but at least they’re too visible to be doing this stuff.

Swish Group in Melbourne pulled this racket earlier this year as it voluntarily went into receivership, appointed their own receiver (because if you voluntarily go into receivership you can) and got out of paying just about nothing on its debts. Of course,  there’s nothing the creditors can do about this. A few months later, the same bunch bought the company name off the receiver and were back in business as the same business. No shame, no pain, no penalty, nothing. I know about this because Swish Films was part of the Swish Group and they racked up debts in Philadelphia and Sydney which they totally stiffed payments upon.

It’s just some pea and shell game, and that’s not the only instance that I’ve witnessed first hand. Here’s another bit from the same article:

“Using the existing mechanisms we are pushing them strongly, and have seen an increase in director disqualifications. That sends a strong message. People take it seriously,” she said.

ASIC has a three-pronged approach to phoenix activity, including a liquidator assistance program, director disqualification and an investigations program.

I think they should have a national kick-murder squad pulled from prisons in the most violent parts of Latin America to be used against directors who phoenix their companies even once but that’s just me. That might be a proper deterrent.

Anyway, it seems even 4 strikes is too lenient. In a real game of baseball a good batter could do immense damage with 4 strikes up his sleeve. Maybe even hit for a .500 Batting Average in a season of 650 plate appearances. So naturally it seems to me it should be 2 strikes and you’re out with this mob, not 4. Four is overly, overly generous.

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