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How the 'Phoenix' company law works

Allan Maclean's Maclean Computing, which went into liquidation earlier this month, has been bought by Maclean Technology, a company run by Maclean's son, Chris. NBR ONLINE asked Lynda Smart, of chartered accountant HFK's insolvency team, how the legislation covering so-called "phoenix" companies works.

Phoenix companies rise from the ashes of failed companies with similar names and similar directors.

But new legislation is changing that, HFK's Lynda Smart says.

She says relatively few prosecutions have come through since the law change in 2007. A case earlier this year was billed as the first major prosecution under phoenix company laws, involving a high profile mortgage broker.

"That is probably indicative that it is relatively new legislation and also most people are quite careful of it now, so I think the legislation's probably had the effect that they wanted. It has acted as a deterrent from people setting them up.

"However, you do still get the odd one coming through."

Section 386 of the Companies Act tries to prevent company directors from effectively shedding their debt and starting afresh, with a similar company name and directors.

"Do people dealing with you, being in business with you, recognise that this is a different entity to the one they used to deal with?" Ms Smart asks.

"For instance, if your company name is similar, or the same name, it could be said that creditors or customers don't realise this is a failed company or this is the phoenix of a failed company. 

"It's about how it's perceived by the public – whether there's the perception of continuity or whether it's quite clear to people that this is a different company to the one they used to deal with."

In the case of Maclean Computers, creditors were notified of the sale, which had the blessing of receivers Waterstone Insolvency – giving it exemption under the Companies Act, under certain conditions.

Receiver Damien Grant told NBR ONLINE the sale was enough to satisfy creditors, who were consulted during the sale process, and whose approval was required under the phoenix law.

Notifying creditors clarifies the company's position, Ms Smart says, so they know they're dealing with a different entity.

She says creditors can then decide if they want to deal with the new company or not.

Ms Smart says business people are being careful about using different company names when they're made aware of the law.

She says this is because phoenix company directors can be held personally liable for the company's debts and the usual limited liability company protections do not apply.

Questions were raised about the effectiveness of phoenix company legislation soon after it came into force, although the dissertation's author says phoenix arrangements can be legitimate and beneficial. 

More by David Williams

Comments and questions
11

I'd go ask those creditors if they were in fact consulted.

How do you explain Appendix A of the liquidators first report – extract - “After having regard to the assets and liabilities of the company and the likely result of the liquidation, the Liquidators intend to dispense with a meeting of creditors as provided for in section 245 of the Act on the grounds that there are no currently known issues in the liquidation which require the consideration of the company's creditors.”

The creditors did not give their blessing for this liquidation and given a chance the creditors would have had plenty of issues with this new phoenix company.

What’s being said and what was done does not match. Am I the only one seeing the discrepancies?

We all are and that's just the beginning

The business failed under the direction of its former CEO. The director should have fired his son along time ago.

It would be interesting to know how the value of the business was determined by the Liquidator before it was sold , and whether the market was fully tested.

Good question. The liquidator must have been "friendly"

As a creditor I can confirm that we were not advised or consulted of the sale. Any suggestion that the creditors were is a complete fabrication.

Any creditors or other interested parties with more information about this story please email me: dwilliams@nbr.co.nz

This is very intresting comment.
Well done NBR in encouraging other creditors to have their say and build a better understanding of this story.
Something is missing and not right in this episode.

David Williams suggest you post your details on Computerworld and reseller tommorrow

“Receiver Damien Grant told NBR ONLINE the sale was enough to satisfy creditors, who were consulted during the sale process, and whose approval was REQUIRED under the phoenix law”.

While NBR David Williams wrote:

"If you’re a creditor, and this didn’t happen, report David Williams (dwilliams@nbr.co.nz) would like to hear from you"

(http://www.nbr.co.nz/article/how-phoenix-company-law-works-weekend-review-dw-123966)."

Something is not right here.