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Australia: ASIC and the ATO crack down on phoenix operators

08 September 2014   (0 Comments)
Posted by: Author: Chris Edquist
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Authors: Chris Edquist, Stephen Natoli and Michael Howard (Holding Redlich)

ASIC and the ATO have the construction industry firmly in their sights as they crack down on 'phoenix operators'. The term phoenix operators refers to companies that suddenly liquidate to avoid paying debts to creditors, employees and the tax office, but then transfer their assets to new enterprises and rise from the ashes to begin trading again almost immediately.

In particular, authorities are focusing on the use of fraudulent statutory declarations. Phoenix operators submit false declarations as evidence that their subcontractors have been paid to claim payment from principals. However, upon liquidation, outstanding debts to employees and subcontractors are often exposed.

ASIC Commissioner Greg Tanzer has warned that directors who take part in phoenix practices and make fraudulent statutory declarations expose themselves to serious consequences. 'While false statutory declarations and fraud matters are matters for other regulatory and enforcement agencies, company officers who knowingly make a false statement regarding payments to creditors may find themselves facing criminal or civil action by ASIC.'

What this means for your business

Everyone involved in the construction industry needs to ensure that they are protected from unscrupulous phoenix operators.

Builders and suppliers who falsely declare they have paid their subcontractors create cash flow issues which have ripple effects throughout the entire industry. This practice exposes parties down the supply chain to non-payment for work undertaken or materials delivered, placing additional financial stress on their businesses and potentially their own subcontractors and suppliers.

Phoenix operators create a separate threat to their competitors as their business model means that they can tender uneconomically for new business and undercut the market, then walk away and write off their debts when the project collapses.

Unrealistic tender prices are of course seductive to principals but are often ultimately deleterious as when a contractor fails the principal will inevitably have to pay a premium in order to get another contractor to take over the job. A whole host of issues are likely to arise at this point including liability for defective work, transfer of risk in the work and consequential insurance problems, personal property securities, payments due to subcontractors, and the need to access bank guarantees.

Subcontractors and supply chain companies can protect themselves through their payment terms and security regimes in their contracts as well as relying on the statutory mechanism under the Personal Properties Securities Act 2009 (Cth) to protect their security interests where appropriate.

Principals and developers, on the other hand, need to ensure that appropriate contractual terms are in place to minimise the effect of any claim for a lien or a security interest on unattached components or equipment used in their projects.

This article first appeared on mondaq.com



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