2. Executive Summary
A phoenix company is a business that has been sold as a going concern to another company or to its managers/directors soon after (and in some cases before) its failure. Provided the business is sold at market value, the phoenix arrangement will be in the interests of creditors. However, where the sale price is less than could have been realised outside the phoenix arrangement, the legitimate interests of creditors will be compromised.
The Ministry considers the problem is most likely to arise before liquidation, when the company is still in the hands of its directors. In liquidation, the company and any asset sales are the responsibility of the liquidator/receiver, who is required to act in the interests of creditors by securing as high a price as possible for the company's assets.
The interest in phoenix companies was heightened by the insolvency of New Zealand Stevedoring Ltd. The Ministry's preliminary conclusion, however, is that the problems that arose in the New Zealand Stevedoring case relate less to the action of directors/owners in using phoenix arrangements and more to public perception around their use and to the order of employees' priority as creditors in the company. It is more appropriate to deal with the order in which creditors' claims are met during insolvency as part of the Ministry's review of priorities. This will allow redundancy payments to be considered against the strength of competing priorities and in the context of promoting the wider public interest.
There remain, however, possible policy issues relating to phoenix companies that may require government action. There is anecdotal evidence available that phoenix companies are, in certain circumstances, being used to defeat creditors' legitimate interests. The Ministry's preliminary assessment is that this problem stems from ineffective enforcement of the existing provisions of the Companies Act. Ineffective enforcement in turn appears to stem from:
- The high cost of accessing the judicial system;
- The free rider problem and high transaction costs;
- The creditors' perceived probability of successfully challenging the phoenix arrangement; and
- The low (civil) penalties in the event of a successful court case.
However the nature and magnitude of the problem outlined above remains somewhat uncertain. The evidence is mainly anecdotal as statistics are not collected on the prevalence of phoenix companies and the types of phoenix company that arise. For this reason, the Ministry is seeking comment on our preliminary assessment that the problem is mainly one of insufficient enforcement rather than inappropriate legislation. Similarly, as well as seeking comment on the options identified in the paper, the Ministry is also seeking comment on whether there are other options that will more effectively deal with the problems arising from phoenix companies than those outlined.
The Ministry recommends that:
- Lawyers be able to operate on a contingency fee basis when enforcing insolvency provisions; and
- Criminal penalties be available to the courts where directors are shown to have acted in bad faith to defeat creditors' legitimate interests.
Back to Top