17.11.2009
Australia has seen a dramatic spike in the number of company directors associated with multiple incidences of external administration, according to new research released by Dun & Bradstreet. The research reveals a 25 percent spike in the number of companies entering external administration during the 2009 financial year that had at least one Director who had previously been involved with a wound-up entity.
Company directors associated with multiple incidences of external administration
The research comes after Tax Commissioner Michael D'Ascenzo recently told a Senate Estimates Committee hearing that there had been a significant increase in phoenix companies being established. 'Phoenix' trading is a term commonly used to describe the transferring of business or assets from a financially distressed company to a new company controlled by the same directors for little, if any, consideration. This activity can costs taxpayers, creditors and employees millions of dollars each year in lost earnings.
The Dun & Bradstreet analysis reveals just how big the problem may be. While external administration does not necessarily mean a business has failed and multiple incidences of association with wound-up entities does not necessarily equate to the existence of phoenix activity, a search of the more than 2.8 million credit active entities in Australia on the Dun & Bradstreet database reveals a disturbing trend in Directors winding up companies only to become associated with others in a short period of time.
The research shows that the increase in the number of corporate Directors associated with multiple incidents of external administration in the 2009 financial year was more than six times greater than those with no previous incidents.
Particularly worrying is the repeat nature of much of the activity and the fact that many of these Directors are currently associated with operating entities. There are literally thousands of Directors who have been associated with four or more incidents of external administration that currently sit on the Board's of operating entities. The number of Directors associated with at least four entities that have entered external administration increased by 18 percent in the 2009 financial year.
Nearly 400 Directors have been associated with ten or more incidents of external administration and currently sit on the Board of an operating entity and a handful of Directors currently sitting on the Boards of operating entities have been involved with 100 or more previous events of external administration. In several instances there are individuals who are Directors of more than 100 currently operating entities who have previously been involved with more than 200 incidents of external administration.
The findings should come as a warning sign to creditors as further Dun & Bradstreet research shows that Directors on the Board of a business that has gone into external administration are 250 percent more likely to be involved in an insolvent wind-up at some stage in the next twelve months. Those entities are also nearly twice as likely to default on a trade payment during this time.
Furthermore, the problem is not likely to go away. Dun & Bradstreet has identified 38,000 firms as being at high risk of experiencing financial distress over the next twelve months. This is 4,000 more than the same time last year, meaning that more firms are rated a high risk of failure during a time when the economy is expected to improve than were at risk during the crisis.
This trend is consistent with other periods in which the Australian economy has returned to growth after a slowdown. It reflects the pressure placed on business cash flow from a rapid increase in orders and the resultant rise in labour and material costs but often an extended delay in receiving payment for those orders. Dun & Bradstreet's trade payment data reveals that firms are taking 55 days on average to pay their bills.
Dun & Bradstreet CEO Christine Christian believes the trend of the last twelve months is likely to continue as cash flow pressures remain even as sales pick up.
"The truth is that business health is dependent on cash flow. A sale isn't a sale until your bill is paid and this means that many firms are likely to be challenged by rising costs to meet an increase in orders but an extended period of delay before receiving payment," said Ms Christian.
"Of course this problem becomes far greater if your customer enters external administration which generally means you have little chance of getting paid. Knowing who is behind the entity you are dealing with is critical if businesses are to avoid the pain that comes with a customer ceasing to operate."
There are many warning signs pointing to potential loss based on a Director's history in addition to an association with companies that have entered external administration. Dun & Bradstreet research reveals that a company is eight times more likely to fail if one of its Directors has a court action against them. The likelihood of failure increases by 33 per cent for court actions valued at more than $10,000, making the business 11.1 times more likely to fail than an organisation with no Director court actions present.
Ms Christian says knowing your customer is not just a legal requirement for many companies but is an imperative if firms are to avoid losses from fraud.
For further information please contact:
Danielle Woods
D&B Corporate Affairs Manager
T: 02 8270 2926
E:woodsd@dnb.com.au
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About D&B
D&B is the world's leading provider of business-to-business credit, marketing and purchasing information and receivables management services. D&B manages the world's most valuable commercial database with information on more than 150 million companies.
Information is gathered in 193 countries, in 95 languages or dialects, covering 186 monetary currencies. The database is refreshed more than one million times daily as part of D&B's commitment to provide accurate, comprehensive information for its more than 150,000 customers.
The Australasian operations were bought out by the senior management group in August 2001. It was the first MBO of a wholly owned subsidiary in D&B's history worldwide.
Today Lazard Carnegie Wylie owns an approximate 90% stake in DBA and the local management team a 10% stake.
Strategies for future growth include developing DBA's commercial and consumer credit referencing business; expanding its receivables management outsourcing business; maintaining its lead in the development of unique credit and risk scoring products; and developing new products specifically tailored to the Australasian market. DBA currently employs over 500 people in Australia and New Zealand.
