Phoenixes: let them rise or shoot them down?

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You may have heard the phrase “doing a phoenix” in respect to a business closing down then appearing to resurrect itself without paying any creditors. As I am not a lawyer, I copied the definition below from www.legislation.govt.nz to articulate the legal definition.

In the Companies Act 1993:

“Phoenix company means, in relation to a failed company, a company that, at any time before, or within 5 years after, the commencement of the liquidation of the failed company, is known by a name that is also – (a) a pre-liquidation name of the failed company; or (b) a similar name pre-liquidation name means any name (including any trading name) of a failed company in the 12 months before the commencement of that company’s liquidation similar name means a name that is so similar to a pre-liquidation name of a failed company as to suggest an association with that company.

“For the purposes of sections 386A to 386F, a company is known by a name if that name is its registered name or if it carries on business, or carries on a part of its business, under that name.”

The above is nearly always seen as a “dirty” tactic as the director/s seem to be getting away with people’s hard-earned money by being clever and sneaky.

Luckily, liquidators and good commercial litigators, often with the assistance of private investigators, can uncover what is truth and what is ‘smoke and mirrors’.

When a business fails through no fault of the director, creditors can be very understanding as long as the communication is open and honest. But if the creditors feel that they have been deceived then this understanding evaporates.

Once the ruse is discovered it can decimate the reputation of not only the director but also any well-meaning advisors who recommended the course of action.

So, what can happen legally?

There are some severe penalties for breach of the phoenix company rules – a fine of up to $200,000 or up to five years in jail; these penalties may also apply where the phoenix entity is an unincorporated business. The directors will also be personally liable for all debts incurred by the phoenix company and not be protected as they would otherwise be.

In my experience this practice is prevalent in the construction and trades sectors with directors who may have been disqualified appointing family members or previous staff members to director positions while they “advise” on the operation of the business. Often this can only be described as an amazing co-incidence and the day after the director’s bankruptcy or banned period ends they are unanimously elected as the new managing director!

When you on-board a new client make sure you do a bit of homework on the shareholders’ other previous businesses, just to ensure that you avoid your business being pooped on by a phoenix.

Doing the right thing in business may not always be the most profitable or easiest thing to do, but it will always be the best choice.

Just a thought.

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Nick Kerr
Nick Kerr
Nick Kerr is the director of IPI Group Limited. He can be reached on 021 876 527 and nick@nzipi.com.

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