Statement of Options
The options identified are:
Option One - Status Quo
There are already a number of provisions in the Companies Act which attempt to prevent the use of phoenix companies to defeat the legitimate interests of creditors. These include:
- provisions stating the duties of directors when they exercise powers or perform duties;
- a provision dealing with transactions for inadequate or excessive consideration with directors or certain other persons;
- a provision dealing with the repayment of money or property to the company by certain persons, including past or present directors; and
- a provision dealing with the prohibition of directors.
Option Two - Imposition of Criminal Penalties Where Directors Have Acted in Bad Faith in an Attempt to Defeat the Interests of Creditors
The purpose of criminal penalties would be to increase deterrence by making directors significantly worse off in the event they have initiated a transaction in a deliberate effort to defeat creditors legitimate interests and to give the government, through the Registrar of Companies, primary responsibility for enforcement effort, in comparison to the current reliance on private action.
The main disadvantage of this option is that increasing penalties runs the risk of discouraging directors from taking sensible business risks, perhaps to the point where it disadvantages the company and its creditors.
Option Three - A Restriction on the Re-Use by Directors of the Names of Companies In Liquidation
This restriction would prevent directors of companies in liquidation setting up phoenix companies re-using the name of a company in liquidation, so as to avoid the possibility that creditors of insolvent companies might believe that they continue to deal with the former business.
An advantage of this restriction on company names is that it is easy to enforce. However, a disadvantage of the restriction will be that any value in a company name will be lost at the point of insolvency. Though not significant, this may be a factor in a purchaser's decision to rehabilitate the business.
Options two and three are preferred. Legislation providing for criminal penalties to be imposed where directors are shown to have acted in bad faith to defeat the legitimate interests of creditors and creating a restriction on the re-use by directors of names of companies in liquidation, combined with the existing provisions in the Companies Act, is seen as the best way to change the perception within the business community that the laws dealing with phoenix companies are not adequate.
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