1.0 – Introduction – A profitable business in an insolvent company
Companies can be placed into liquidation for a variety of reasons including:
- Mismanagement by the director of the Company (including taking excessive drawings)
- Poor execution or performance of a contract
- Staffing issues
- Key Customers refusing to pay the Company
It is possible that a Company may have a profitable business but be insolvent because of historic reasons out of a director’s control, or because of a short period of poor financial performance.
The flow on effect of this is that a director may be left with a business which is trading profitably on a monthly basis but is shackled by historic debt.
A common question from directors and creditors of insolvent companies is whether a director, can start a new company after liquidating their company.
The answer is yes but it depends.
A director of a Company does not have an immediate stand-down period after a Company is placed into liquidation, and may start a new Company, however, there are some restrictions which apply.
By way of example:
Director A is the director of Genius Building Limited, a Company placed into liquidation with creditors totalling $200,000.00.
In this particular example, under ordinary circumstances:
Director A can incorporate a new building Company, but it cannot be ‘the same business’ as Genius Building. I.e., Director A could incorporate a new Company, Proximity Building Limited and provide building services.
Director A cannot incorporate ‘Genius Building 2022 Limited’; this Company would be deemed to be a phoenix Company under the phoenix company provisions per section 386 of the Companies Act 1993 (the Act).
If for a particular reason, Director A would like to establish a new Company with the same or similar business of Genius Building Limited, it is possible, but a specific process must be followed.
2.0 – The Phoenix Company Provisions
The Phoenix company provisions are detailed in section 386 – 386F of the Act.
The key provisions are outlined below:
2.1 – Section 386A and 386B
Section 386A of the Act provides for the following:
- Except with the permission of the court, or unless one of the exceptions in sections 386D to 386F of the act applies, a director of a failed company must not for a period of 5 years after the date of commencement of the liquidation of the failed company, –
- Be a director of a phoenix Company; or
- Directly or indirectly be concerned in or take part in the promotion, formation, or management of a phoenix company; or
- Directly or indirectly be concerned in or take part in the carrying on of a business that has the same name as the failed company’s pre-liquidation name or a similar name.
Key terms associated with Phoenix companies (per section 386B of the Act):
Director of a failed company: Means a person who was a director of a failed company at any time in the period of 12 months before the commencement of its liquidation.
Failed Company: Means a company that was placed into liquidation at a time when it was unable to pay its due debts.
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 pre-liquidation name of the failed company; or
- 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 familiar to a pre-liquidation name of a failed company as to suggest an association with that company.
In the previous example:
Genius Construction 2022 Limited is a phoenix Company because it has a similar name to the failed company, Genius Construction Limited and suggests an association to the failed company, Genius Construction Limited; therefore, by default Director A cannot be the director or be directly or indirectly involved in the management of Genius Construction 2022.
That being said, it is possible for Director A to be the director of a company named Genius Construction 2022, provided one of the exemptions are met.
2.2 – Section 386D of the Act
Section 386D of the Act outlines an exemption for a person named in a successor company notice.
The criteria to gain an exemption under section 386D is broadly as follows:
A Successor Company must acquire the whole or substantially the whole of the business of a failed company under arrangements made by a liquidator, receiver, or deed of company arrangement (under part 15A).
A Successor Company Notice must be sent by the successor company to all creditors of the failed company (for whom the successor company has an address).
The notice must specify and state:
- The name and registered number of the failed company
- The circumstances in which the business has been acquired by the successor business.
- The name that the successor company has assumed, or proposes to assume, for the purpose of carrying on that business.
- Any change of name that the successor company has made or proposes to make for the purpose of carrying on that business.
- The director must state his or her full name, the duration of his or her directorship of the failed company and the extent of his or her involvement in the management of the failed company
In the previous example:
It is possible for Director A to be the director of Genius Construction 2022 Limited, provided:
- Director A acquires the whole or substantially the whole of the business of Genius Construction Limited from the liquidator
- Director A sends a successor company notice to all creditors of Genius Construction Limited meeting the criteria above.
3.0 – Examples of Phoenix Companies
We have been involved in numerous restructuring efforts which involved the liquidation of failed companies as part of a wider restructuring of the Companies affairs.
Two examples include:
3.1 – Excellent Spray painting Limited
Excellent Spray painting Limited (ESL) operated a spray-painting business, providing spray painting services for residential properties.
Due to staffing issues ESL had incurred significant liabilities.
The Company was trading profitably on a month-by-month basis, but the profits were insufficient to address ESL’s historic debt.
Upon appointment we sold the business of ESL to a successor company.
The sale of the business was paid overtime and, in our opinion, maximised recoveries for the assets of the Company while also minimising costs associated with the liquidation.
The end result was as follows:
- The business of ESL was sold preventing disruption to stakeholders (including customers).
- Distributions totalling $42,000 were paid to the creditors of the Company.
- The realisable value of the business was maximised, while the costs of the liquidation were minimised.
3.2 – Pristine Tacos Limited and Superior Dining Experience Limited
Pristine Tacos Limited (PTL) and Superior Dining Experience Limited (SDEL) traded two restaurants based in Wellington with the same shareholders of both companies.
The businesses had incurred liabilities to creditors due to poor economic conditions caused by Covid-19 (including the lockdowns in 2020).
PTL had a short period of time left on the lease left for the premises, the management wished to continue trading the business to avoid disruption to stakeholders (including the landlord) for a breach of lease.
Meanwhile, SDEL was undergoing a significant restructuring of its financial affairs including a recapitalisation of the business.
Prior to appointment, we arranged for a registered valuation of the fixed assets of both companies and formed a view of the value of the assets and business of both companies.
Both companies were placed into liquidation and in accordance with the valuation, we sold the businesses of both companies to a successor company established by the management of both companies.
We worked with the management of the Companies and their legal counsel throughout the process to ensure the sale proceeded without issue and the exemption under S386D was satisfied.
The end result was as follows:
- Substantial distribution to a secured creditor of SDEL.
- Minimal disruption to stakeholders of SDEL and PTL (including staff and landlords).
- The recovery for the assets of the Company was maximised while costs of the liquidation were minimised.