The problem of "phoenix companies" is not new. However concerns have been heightened recently over the ability of directors and managers of a failed company to defeat creditors' legitimate interests in pursuit of their own interests.
The phoenix company is a result of the widespread availability of the limited liability company and separate corporate identity. The Australian Securities Commission defined a phoenix company as a company that satisfied the following criteria:
the company failed and it was then unable to pay its debts; and/or
the company acted in such as manner as to intentionally deny its unsecured creditors equal access to available assets so as to meet its unpaid debts; and
within a year of the company closing, another business (the phoenix) was commenced which may have used some or all of the assets of the former business and the subsequent business was controlled by the parties who were related either to the directors or the management of the previous company.
In the US, the term "strategic bankrupt" has been coined to describe a similar type of situation. It is lawful for an insolvent company to sell its assets at market value to another party. This well-established insolvency technique is known as a "hive-down". In that event, it can enable a company to be sold as a going concern for market value. Sometimes the business may be sold to existing management. The difficulty is distinguishing a decision to sell the company's assets in good faith and on proper terms as opposed to an action to avoid liability.
The problem of phoenix companies was highlighted in this country by the actions of the New Zealand Stevedoring Company Limited, which in 1998 reorganised its affairs and so avoided paying $14 million in redundancy payments to 300 staff and wharf employees. As a result of the ensuing debate, the then government included the issue of phoenix companies in the insolvency review being undertaken by then Ministry of Commerce in conjunction with the Law Commission.
Earlier this year, the Ministry for Economic Development released a preliminary discussion document on phoenix companies. The two main recommendations were made:
that lawyers be able to operate on a contingency fee basis when enforcing insolvency provisions; and
that criminal penalties be available to the courts where directors are shown to have acted in bad faith to defeat creditors' legitimate interests.
Public submissions closed on 6 April 2001. The Ministry has since indicated that policy decisions will be made in late 2001 with a view to the introduction of legislation in 2002.
This article is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this article.
Copyright Phillips Fox, 2001
Author - Michael Bos: michael.bos@phillipsfox.com
December, 2001
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