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'Phoenix Companies' on the Rise in 2010
5 July 2010
Credit check a company and its individual directors to minimise business risk
5 July 2010: New research reveals 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 on the remnants of a failed company, and are often used as a means of evading creditors or creating the impression of a clean company history.
Veda Advantage found one in ten directors behind newly registered companies in March 2010 was linked to an adverse credit history with another company in the six months prior to starting the new company. Adverse credit history includes defaults, writs and judgements, court summons and bankruptcies.
Veda Advantage investigated external administration activity on its credit bureau from August 2007 to March 2010, and found directors of companies entering into external administration in March 2010 were twice as likely to start a new company within six months, than during the height of the global financial crisis in May 2008. Directors with some type of adverse incident on their credit file are seven times more likely to default in future than directors with a clean credit history.
Key findings of the Veda Advantage phoenix company research includes:
- When running a business credit check on Veda Advantage's credit bureau, the statistical probability of discovering negative information on a company is 9%. However, this risk increases to 23% when the search includes a company director history check **.
- Almost one in ten (9%) directors had links to another company with an adverse credit history. This rose to 14% of directors over a 12 month period and 24% of directors over 24 months.
- 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.
- Directors can often be involved with about eight or nine other companies.
"New business registrations in Australia are at their highest level since 1999 - up 23% for the March quarter in 2010 over the same period last year. Yet Veda research found one in ten directors behind these new incorporations have links to a company which has failed, or have a negative credit history, meaning they could be a credit risk to a business' cash flow if the new business is masking liquidity problems, said Chris Gration, Head of External Relations Veda Advantage.
Chris Gration recommends all businesses apply a simple background check on potential customers and suppliers to help safeguard against risky business relationships - focusing on directors and company owners and not just the business entity itself.
Chris Gration said Veda Advantage's range of trading history and in-depth trading history reports were one of the best ways to help defend against becoming involved with a phoenix company. "Smart credit managers research the credit files of the directors behind the company, to help gain a complete business health check. In the current financial climate, ignoring the signs of a problem customer or supplier could be the difference between collapse and survival.
"We have found directors can often be involved with about eight or nine other companies. One of the companies they are involved with may be trying to hide debt, which could have a negative impact on the company you are dealing with," he said.
Source: Veda Advantage bureau March 2010.
Rate at which Directors of Existing Companies Incorporate New Companies
Source: Veda Advantage bureau March 2010.
* 'Phoenix companies' are businesses which are formed on the remnants of a failed company. Often a director, or directors, transfer assets of an indebted entity 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. Phoenix companies are legal provided the director behind them is not under bankruptcy restrictions.
** The Veda Advantage study looked at the past twelve months of commercial enquiries, consumer and commercial defaults, using Veda Advantage's bureau information in addition to publicly accessible information including Court Judgements, Writs, Petitions, and External Administrations. The study examined the likelihood of finding adverse information on a company, and the directors behind the company.
- Ends-
Media information: Sally Robertson at Launch Group 02 9492 1089 or 0400 927 003
About Veda Advantage www.vedaadvantage.com.
Veda Advantage has been at the forefront of the information services industry for many decades. Issues such as privacy, data security, fraud and business intelligence are part of our commercial landscape. We provide insights into more than 16.5 million credit active individuals and 4.4 million companies and businesses. You can apply for a copy of your business or company credit file at www.mycreditfile.com.
DISCLAIMER
Purpose of Veda Advantage media releases:
Veda Advantage media releases are intended as a contemporary contribution to data and commentary in relation to consumer credit activity in the Australian economy. The information in this release is not intended to provide guidance or commentary as to Veda Advantage's financial position nor does it constitute legal, accounting other professional financial advice. The information may change and Veda Advantage does not guarantee their currency or accuracy. To the extent permitted by law, Veda Advantage specifically excludes all liability or responsibility for any loss or damage arising out of reliance on information in this release and the data in this report, including any consequential or indirect loss, loss of profit, loss of revenue or loss of business opportunity.
