This is a $5 billion scam hurting honest Australians.

Illegal phoenix activity — where company directors deliberately collapse businesses to dodge debts, only to resurface under a new name — is one of Australia’s most destructive white-collar crimes. According to the Australian Taxation Office, it costs the economy nearly $5 billion annually, including:

• $3.3 billion in unpaid debts (leaving small businesses, contractors, and employees out of pocket).
• $1.5 billion in lost tax revenue (meaning fewer funds for schools, hospitals, and infrastructure).

Despite these staggering losses, enforcement remains weak. The corporate watchdog, ASIC, rarely prosecutes offenders, liquidators lack funding to investigate properly, and creditors — often small businesses — are left powerless. This must change.

How the system fails: A case study

The collapse of a company contracted by a government department in 2023 to deliver service improvements to an iconic charity network around Australia is a textbook example of how phoenix operators exploit the system and how government and often captured regulatory bodies fail to act.

Key findings from the liquidator’s report were:

• More than $2.1 million in unpaid debts, including $500,000 owed to the ATO.
• Evidence of insolvent trading, director loans, and “unreasonable director-related transactions” – all hallmarks of phoenix activity.
• No meaningful income outside federal government contracts, with operations bearing a striking resemblance to a pyramid scheme (signing up partners but failing to deliver services). Despite these red flags, serious investigation only occurred due to extensive, costly and emotionally exhausting investigations by largely unpaid representatives of the charity concerned, the employment of private investigators to find material to blacken the names of those doing the investigation of the culprit, and the co-operation of cross-bench Senators to draw the attention of Parliament to what was happening. Why?

The enforcement gap

1. ASIC waits for a “perfect case” before acting. Liquidators must hand them a fully compiled dossier, which is expensive and time-consuming.
2. Liquidators lack funding – unless creditors pay, investigations stall.
3. Directors face no real consequences – they simply walk away, shielded by corporate structures, and start a new business days later.

This isn’t a loophole – it’s a licence to steal.

Three key reforms are required to shut down phoenix fraud

1. Properly fund liquidations to stop rubber-stamp wind-ups. The problem: When a company collapses with no assets, liquidators struggle to fund investigations. Creditors — often small businesses — must pay out of pocket, meaning many phoenix cases go unexamined.

The solution:

• Mandate director contributions: If a company claims no assets, directors should be required to pay a minimum toward liquidation costs.
• ASIC-funded liquidations for public money cases: If a company received government funds (as this organisation did), ASIC should directly fund and oversee the liquidation, appointing an independent administrator, not one chosen by the director. This would prevent directors from hiding behind “no asset” claims and ensures proper scrutiny when taxpayer money is involved.
• if a company goes into liquidation while undertaking work on behalf of the government, the government should be responsible for paying any creditors in particular unpaid subcontractors.

2. Strengthen director accountability with real penalties

The problem: Right now, serial phoenix operators face little risk. Even with the new director identification number system, repeat offenders can keep starting new companies.

The solution:

• Automatic, permanent bans for repeat offenders: Directors linked to multiple collapsed companies with unpaid debts should be disqualified for life.
• Stronger DIN enforcement: The DIN system should automatically flag high-risk directors, freezing their ability to register new businesses until past collapses are resolved.
• Personal liability for tax debts: If a director strips assets before collapse, they should be personally liable for unpaid taxes and wages.

Why this works:

Firstly, it makes phoenix activity too risky to attempt, and secondly it ensures real consequences for fraudsters.

3. Empower creditors and whistleblowers to expose fraud

The problem: Small businesses and workers, who are the biggest victims of phoenix scams, have no power to trigger investigations. ASIC acts too slowly, and legal action is too expensive.

The solution:

• “Phoenix tip-off” hotline: Allow creditors, employees, and subcontractors to report suspected phoenix activity directly to ASIC with whistleblower protections.
• Fast-tracked investigations for high-risk cases: If a company has unpaid taxes, wage theft, or government contracts, ASIC should be required to act within 30 days.
• Low-cost legal pathways: Create a small claims tribunal for creditors to recover debts from fraudulent directors without costly court battles.

Why this works:

It shifts power from regulators to victims and secondly it encourages early detection before debts spiral.

The bigger picture: Restoring trust in Australia’s business ecosystem

Phoenix fraud isn’t just a financial crime – it erodes trust in the entire economy. When dodgy directors get away with stealing millions while honest businesses struggle to survive, it sends a dangerous message: “Follow the rules, and you lose. Cheat the system, and you win.” This culture harms workers, suppliers, taxpayers, and legitimate businesses. But it’s fixable.

What happens if we don’t act?

• More small businesses driven into insolvency by unpaid debts.
• More taxpayer money lost to fraudulent contractors.
• More workers left unpaid while directors escape consequences.

What happens if we do act?

• Fewer phoenix scams, meaning more money stays in the hands of honest businesses.
• Stronger ASIC enforcement, deterring fraud before it happens.
• A fairer economy where rules apply to everyone.

Conclusion: Time to ground the pPhoenix for good

Australia’s phoenix problem isn’t a flaw in the law, it’s a failure of enforcement. With simple reforms, properly funded liquidations, real director penalties, and empowered creditors, we can shut down this $5 billion racket.

The choice is clear:

• Continue allowing fraudsters to exploit the system, or
• Take decisive action to protect workers, small businesses, and taxpayers.

Enough is enough. It’s time to end illegal phoenix activity – for good.

The views expressed in this article may or may not reflect those of Pearls and Irritations.