Illegal Phoenix Activity – How to Spot the Warning Signs

Silhouette of a phoenix rising with flames in a burning forest, trees are visibly engulfed in fire and smoke.

Share This Post

Illegal Phoenix Activity – What is it?

The Australian insolvency system is designed to protect employees, and creditors if a businesses can no longer meet its financial obligations. Unfortunately, like any system there are loopholes that criminals and unethical operators can exploit. Phoenixing refers to the practice of a company deliberately closing down (via liquidation or administration) and starting up a new company in order to avoid debts, liabilities, or obligations. The new company then operates in the same market, with the same assets without paying the previous companies debts.

Phoenixing is particularly prevalent in the construction and transport/logistics industries because of the low margins. Whilst the practice is illegal, and those convicted can serve jail time it’s very challenging and costly to prosecute, meaning the cycle will continue. 

Red Flags for Illegal Phoenix Activity

1) Same Directors or Shareholders

Businesses should always be vigilant and check director details via ASIC or credit bureau reports. Where directors have been involved with previously failed entities before, suppliers must operate with care as this can indicate previous phoenixing acitivity.

2) New Companies created for each new project

Setting up new companies for individual projects is a way organisations can protect themselves if things go bad on a particular job. Operators will move assets from unprofitable projects and entities to new projects and entities, leaving nothing behind other than unpaid suppliers.

3) Puppeteering of Directors

This refers to the practice of registering directors of companies that aren’t actually the real directors. This is done to circumvent the legal penalties that are imposed on directors of failed entities. 

4) Not meeting Tax Obligations

Over the last couple of years, the ATO has started disclosing non-payments of tax liabilities to major credit bureaus. Large tax liabilities can be a sign that an operator is intending to liquidate without meeting all creditor obligations.

How Can Businesses Protect Themselves?

Suppliers must be thorough in doing their due diligence on their customers. This means checking the shareholdings and directors via reputable credit bureaus or directly with ASIC. Sadly though, not all phoenixing can be detected. Particularly when an operator phoenixes for the first time. Many suppliers and businesses in the construction and transport/logistic sectors use trade credit insurance to mitigate the risk of losses and bad debts.

Insurers will carry a significant database of historical and current financial information which can help detect potential phoenix activity before it happens. However if your business does suffer a loss because of unlawful customer practices an insured can claim up to 90% of what they are owed.

To discuss we can help you protect your own business from illegal phoenixing please get in contact with us.

More To Explore

A person in a suit stands with hands on hips, facing a blurred, abstract urban background. A logo and text "Debtor Protect" are visible in the bottom right corner.
Bad Debt Protection

Why Fast Claims Processing Matters in Trade Credit Insurance

At Debtor Protect, we go beyond simply offering credit insurance—we ensure that when you need it most, your claims are processed quickly and efficiently. In today’s economic climate, where insolvencies are at record highs, having a policy with a proactive broker and a responsive insurer makes all the difference. The Rising Risk of Insolvencies According

Silhouette of a phoenix rising with flames in a burning forest, trees are visibly engulfed in fire and smoke.
Bad Debts

Illegal Phoenix Activity – How to Spot the Warning Signs

A 2018 ATO report found that illegal phoenix activity was costing the Australian economy up to $5.1 billion annually. ASIC estimate that bad debts for Aussie suppliers and businesses made up over $3.4 billion of this amount.