If things are turning pear-shaped for your business, if you feel like you’re flogging a dead horse, and if you’ve exhausted all avenues of a financial resurgence than it may be time to call it a day… or find a new venture.
It’s perfectly okay to pursue new opportunities, but it’s not okay to jump ship for the wrong reasons. Here’s the skinny on the wrong way to go about pulling the plug on your business:
You’re about to walk away from something that you’ve invested all your blood, sweat and tears into. Understandably, winding up releases a lot of heavy emotions and forces you to swallow your pride. Unfortunately, it’s not as straightforward as emptying your desk drawers and switching the lights out in one final curtain call.
Unlike sole traders and partnerships, companies are independent legal entities so the responsibilities are greater. There are a number of things to consider and processes to follow before closing down and filing for bankruptcy, however the focus of this article is to raise awareness and prevent you from getting caught up in “phoenixing” – the stripping and transfer of assets from one company to another by individuals or entities to avoid paying liabilities.
A number of failed-fraudulent companies have triggered the government to shine the spotlight on company closures, insolvency, bankruptcy and dealings around the liquidation of assets. The Turnbull government announced in this year’s Budget that they will be teaming up with the Australian Securities and Investment Commission (ASIC) to crack down on phoenixing activity, which is estimated to be costing the economy in excess of $3 billion each year.
So how does phoenixing actually work?
Typically, those in control of companies, such as directors or former directors, deliberately avoid liabilities by shutting down the original indebted company (placing it into liquidation), transferring some or all of the assets to another company and then using that company to conduct the same type of business.
“People don’t just wake up one day and work out how to phoenix a company, they are learning that and we are doing everything we can given the existing constraints to disrupt that”, said ASIC’s Warren Day.
Shadow assistant treasurer Andrew Leigh said phoenixing was the equivalent of athletes ‘tanking’, and was fundamentally “un-Australian”.
How does phoenixing impact small business?
Phoenixing is disproportionately damaging small businesses in Australia and is most prevalent the construction, labour hire, transport, security and cleaning industries. Protecting the interest of SMEs is a critical part of maintaining the health of the Australian economy. SMEs employ nearly two-thirds of the Australian workforce. Despite this, business owners continue to struggle to maintain a steady cash flow and aren’t able to rely on timely or whole payment for goods and services rendered.
Genuine company failures do happen. A business may have been responsibly managed, but for one reason or another it fails. According to the Australian Financial Security Authority (AFSA), there were nearly 1,500 business-related insolvency cases alone in the 2017 September quarter. Filing for bankruptcy is something that should only be utilised as a last resort. It is important to consider alternative arrangements in order to pay off debt before engaging in declaration of bankruptcy.
Don’t be tempted by dodging your debts and delving in illegal activity. If your business runs into financial trouble, it is important to understand what options are available. Sign up for your free trial to Checkpoint to receive expert advice to help keep yourself out of trouble and your business above board.