Bid to stop 'phoenix' rising
Investigations will be conducted into the pre-collapse activities of 1000 failed companies, as well as the creation of a new surveillance program to boost the early detection of phoenix activity, according to the Australian Security and Investments Commission.
The plan follows a 2012 report commissioned by the Fair Work Ombudsman that identified phoenix activity as a "significant problem" for the sector, which could cost employees up to $350 million in lost wages and entitlements a year.
Phoenix activity is the fraudulent act of transferring the assets of an indebted company into a new entity - usually operated by the same director - in a bid to to avoid paying creditors, tax or employee entitlements.
"We are interested in construction - and labour-hire because it is closely connected - because it's in this industry where much of the illegal or fraudulent phoenix activity occurs," an ASIC spokesman said.
"Our new surveillance program is proactive - it aims to detect and deter this type of conduct before it happens."
But some industry experts warn that it can be difficult to detect.
"Those who can benefit by it - the shareholders, suppliers and employees that get carried along - pretty much close ranks and that's where I think ASIC would find it a problem," said Robbie Berry, of BCR Partners.
Research conducted by PriceWaterhouseCoopers on behalf of the Fair Work Ombudsman has classified building and construction as a "medium risk" industry for phoenix activity, although certain trade categories such as bricklaying were deemed "high risk".
The report found phoenix activity cost the average employee $9897 and affected between 1 per cent and 5 per cent of industry workers.
ASIC reports that administrators flagged 3765 incidents of potential criminal offences and civil misconduct in the construction industry in initial reports filed with the regulator in the financial year 2011-12. The industry posted the second-highest number of incidents after the category "other business and professional services" (4823).
The move against the building and construction sector is part of a wider crackdown on phoenix activity that will include surveillance and investigations of the labour hire, transport and security industries.
The regulator plans to look at the activities of 2500 directors at 1400 companies that were wound up after July 2011.
cvedelago@theage.com.au
Twitter: @chrisvedelago
Frequently Asked Questions about this Article…
Phoenix activity, or phoenixing, is the fraudulent practice of moving assets from an indebted company into a new entity—often run by the same director—to avoid paying creditors, tax and employee entitlements. It matters to investors because phoenixing can hide real business risk, distort supplier and contractor payments, and has attracted regulatory crackdowns that can affect entire sectors such as construction.
ASIC is concentrating on construction and related labour‑hire businesses because industry research and regulator reports show much of the illegal or fraudulent phoenix activity occurs there. PricewaterhouseCoopers research for the Fair Work Ombudsman classified building and construction as a medium‑risk industry (with some trades like bricklaying deemed high risk), and administrators flagged thousands of potential offences in construction in recent years.
ASIC has pledged investigations into the pre‑collapse activities of about 1,000 failed companies and is creating a new proactive surveillance program to boost early detection of phoenix activity. The regulator also plans to review the conduct of around 2,500 directors at 1,400 companies wound up after July 2011 and extend surveillance across labour hire, transport and security sectors.
According to reports cited by regulators, phoenix activity can be significant: a 2012 Fair Work Ombudsman‑commissioned study estimated phoenixing could cost employees up to $350 million a year. PwC research found the average affected employee lost about $9,897 and that between 1% and 5% of workers in the sector could be impacted. Administrators also flagged 3,765 potential criminal or civil incidents in construction in the 2011–12 financial year.
ASIC’s wider plan to tackle phoenix activity includes surveillance and investigations of labour hire, transport and security industries in addition to the building and construction sector.
Industry experts warn detection can be hard because those who benefit—shareholders, suppliers and employees who might be carried along—can close ranks and obscure transactions. That clustering around the same parties and recurring business structures makes it more challenging for regulators to spot fraudulent transfers and pre‑collapse behaviour.
ASIC reports that administrators flagged 3,765 incidents of potential criminal offences and civil misconduct in the construction industry in initial reports filed during the 2011–12 financial year, making construction the second‑highest industry by number of flagged incidents behind 'other business and professional services.'
Everyday investors should watch regulator announcements from ASIC and research such as the Fair Work Ombudsman and PwC reports that highlight industry risk levels. The article shows construction and some trades (for example, bricklaying) are higher risk, and ASIC’s new surveillance program and director reviews signal increased enforcement—information that can be relevant when assessing exposure to companies in those sectors.
Call 1300 880 160
Start a chat
Schedule a call
