New research by Veda Advantage shows a significant rise in the number of “phoenix companies” incorporated in the wake of the global financial crisis.
“Phoenix companies’” are businesses which are formed from a failed company. Often directors transfer assets of an indebted company into a new company of which they are also directors. These directors then place the initial company into administration or liquidation with no assets to pay creditors and continue to trade under the new company structure.
Often the new company will adopt the name, address and other details of the old company which creates an impression of a single continuing business. Phoenix companies are legal provided the directors behind them is not under bankruptcy restrictions.
In the wake of the Global Financial Crisis new business registrations are at the highest level since 1999, up 23% for the March quarter in 2010 over the same period in 2009. Veda research found 1 in 10 people behind these new corporations have links to a company which has failed, or have a negative credit history. Directors with some type of adverse incident on their credit file are seven times more likely to default than directors with a clean credit history.
Businesses should consider performing background checks on business owners of potential suppliers and customers. They should look beyond the Company itself to identify other companies the directors are involved in. Sometimes debt can be hidden in other companies so thorough checking is required to uncover risky business relationships. Consider processing invoices against the customers ACN/ABN rather than relying on its business or company name (which can be transferred)
Bayston Group can assist by identifying searches and publicly available information on both the company and its individual office-holders which can give you a better idea of the relative risk of business relationships.