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."

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.