The construction industry has endemic problems with phoenixing, critics say.CREDIT:JOE ARMAO
CAAN selected this comment …
‘When you look at the results of phoenixing in the construction industry, the Ensuring Integrity legislation must be the most hypocritical act of a government renowned for its Christian Values and its selfless adherence to High Moral Standards.
I’ve been phoenixed twice – it’s not illegal, just plain immoral and shattering to it’s victims. Personally, I favour exta-judicial justice, but I’m told that is illegal. There’s no justice in this system.’
At CAAN we share with you a lot of facts … reference to these ‘facts’ often appear in the intro to articles like this! For example, Scomo wrote the policy for the developer lobby, the Property Council of Australia before he entered politics … is this why he was annointed? And is this why this lobby group hold so much sway with our governments? Cough … cough …
WHY not start by spreading the word? …
We have to counter this corruption … Albo recently challenged the Coalition talk of the thuggery of the Union Movement by saying that most UNION MEMBERS are NURSES!
Small business flattened by ‘dodgy’ builders in phoenixing epidemic
By Nigel Gladstone and Carrie Fellner
NSW construction companies collapse at levels not seen elsewhere in the country with more criminal misconduct allegations made against them than in other states.
*Administrators found evidence of wrongdoing in 561 construction industry businesses that failed in NSW in 2017-18, reflecting a pattern of “phoenixing” that is difficult to prosecute because it is not illegal in all cases.
Illegal “phoenixing” occurs when company directors move assets from one company to another to avoid debts or liability for issues like building defects leaving creditors with the bill when the company is liquidated.
It costs the economy up to $5 billion each year.
Australian Restructuring Insolvency and Turnaround Association CEO John Winter said phoenixing has been “endemic” for decades.
“It’s become a learned behaviour in the property market because it’s gone on for so long (and) because nobody has really been prosecuted to any great extent,” Mr Winter said.
On Monday, the Herald detailed the broken business model in the NSW building industry that experts say has reached epidemic proportions: developers and builders creating $2 companies to carry out apartment projects, taking the profits and then shutting them down before they can be pursued in court over any defects bill.
The Berejikilian government and newly anointed Building Commissioner David Chandler have both failed to publicly lay out plans to address the problem and did not respond to questions from the Herald, sparking accusations their response to the building defects crisis has been “defective”.
Sydney-based developers, The Merhis Group, with projects across western Sydney worth up to $145 million, were accused of phoenixing recently.
The allegation was made by liquidators from Helm Advisory in documents filed with ASIC in April. The Merhis Group denied the allegations to the Herald. It settled claims from creditors in late September, agreeing to pay about $20 million to the tax office and other creditors involved in the collapse of more than half a dozen of their subsidiaries.
When a company is phoenixed there are few or no assets left to fund legal action against the directors.
If a company has no assets and liquidators want to take legal action to pursue directors for illegal phoenixing or other misdeeds they can apply to use ASIC’s Assetless Administration Fund. Most applications are rejected, with fewer than one in three of the 1524 requests made in 2016/17 and 2017/18 approved.
ASIC, generally, has less than 20 successful prosecutions against directors in a year, despite more than 7000 reports of misconduct, Mr Winter said.
Introducing new laws targeting illegal phoenixing last month Assistant Treasurer Michael Sukkar pledged to add $8.7 million to the fund over four years.
*Phoenixing is also fanned by “dodgy” pre-insolvency business advisors who tell directors how to phoenix by stripping assets, and destroying their books, the ARITA boss Mr Winter said.
Liquidator Anthony Elkerton of DW Advisory said many construction insolvencies are small business victims of a cascading industry which employs down a line of sub-contractors.
“If there’s any delay in payment or non-payment further up the chain, it exacerbates as it comes down and those people (smaller trade businesses such as plumbers) are forced into liquidation,” Mr Elkerton said.
“The next size up the chain is the employer of 10-30 employees and that’s probably where you see most classic phoenixing,” he said. “They’re still at the whim of those above them in the chain but they have a substantial number of employees and non-payment of taxes and superannuation is generally the first thing that happens when cash flow gets tight.”
These businesses are “prey” for “shonky” pre-insolvency business advisors, he said.
The next level up is the directors who go into a business expecting to phoenix and use it as an advantage to offer lower quotes, via net tax tendering, based on assuming no tax will be paid.
“Most of the parties that operate in the phoenix world have their personal affairs set up so they have no assets, they might be in a spouse’s name or in a family trust,” Mr Elkerton said. “So even if you know you would be successful in pursuing the action, there is no benefit to creditors in doing so.”
ASIC’s enforcement investigations increased by 20 per cent last year, and since 2014 a Phoenix Taskforce has clawed back more than $500 million from phoenix operators.
ASIC prosecuted 382 people for failing to keep books and records last financial year, which is an indicator of phoenix activity. However very few of these cases result in jail time or significant penalties.
Peter Kalos, of Kurnell, was disqualified from managing companies by ASIC for the maximum period of five years, in part due to phoenix activity at nine failed businesses, some in the property industry. Despite going under with debts of almost $8 million, Mr Kalos had the ban halved on appeal.
In January, a property developer of five beachfront apartments in Manly, Benjamin Ensor, was sentenced to six years jail and ordered to pay more than $1.8 million after being found guilty of illegal phoenix activity and GST fraud.
Less than 11 cents in the dollar was recouped from insolvent companies in 97 per cent of cases over the past 3 years.
Nigel Gladstone is The Sydney Morning Herald’s data journalist.
Carrie Fellner is an investigative reporter for The Sydney Morning Herald.