The phoenix – a mythical bird with immortal qualities and best known for its ability to rise from the ashes of its predecessors.
Much like the mythical beast, businesses can also rise from the ashes of a failed company.
Directors will often burn the old company and then start a new company. They continue to trade the same business with the same name as if nothing has happened. This is known as a phoenix company.
This has the potential to upset creditors that are left out of pocket due to the failings of the old company. Naturally you might feel irritated when you are owed money from the failed company, which is now trading as a “new” company, with the same name, assets, and staff, as if nothing happened.
The above is generally not permitted by the Companies Act 1993, however there are exceptions to allowing a company to continue trading in the above way.
How is this legal and what is the exception?
The general rule is that the director(s) of a failed company cannot be the director of a phoenix company, with the same or similar name, for five years. The exceptions to this rule are set out in sections 386D – s386F of the Act:
- The successor company or the new company must purchase all or most of the business from the liquidator or receiver of the old company, or under a deed of company arrangement (this ensures that fair value is paid as the liquidator or receiver could be liable for a sale at gross under value); and
- A successor notice must be sent to all known creditors (this needs to be sent within 20 working days from the sale of the business and include details certain details of the transfer and who is now running the new company).
Essentially the successor notice is designed to inform the creditors about the new company and the insolvency of the old company. This gives the creditor the opportunity to decide whether or not to continue trading with the new company.
To creditors, this might not seem fair, however this is a legal built-in pathway in the Act to allow phoenix companies to continue if the exceptions apply. In the case of a liquidation, the liquidators will do what they can to recover assets for the benefit of the creditors and hopefully distribute.
Unless the above exceptions apply, there are penalties for directors of phoenix companies. These penalties are set out they are the harshest tier that the Act has; being imprisonment for up to five years and/or a fine of up to $200,000.
When to implement a Phoenix Company?
Phoenix companies are usually considered where the company is facing an insurmountable financial difficulty or has suffered a major unexpected loss.
Phoenix companies are worthwhile implementing when the business within the failed company is or has traded in the black (i.e. profitably). In other words, the trading business of the company need to be worth saving.
Phoenix companies are particularly useful if you have a successful business trapped by historic debt that won’t allow the business to move forward.
The phoenix company can be a powerful tool, and it is worth considering, provided the Act is complied with and the exceptions apply. Expert advice is needed to implement a compliant transaction, and if you have any questions or queries do not hesitate to contact myself or one of our directors, Adam and Damien to discuss your options.
