Statement of the Net Benefit of the Proposal
The benefit of these proposals is that it could be seen that the government is taking action to deal with the perception that the laws dealing with phoenix companies are inadequate.
The first proposal is the introduction of a restriction on the re-use by a director of a company in insolvent liquidation of the name of that company. This will also reduce the risk of the value of the business being lost to the directors (through the non-payment of goodwill associated with the company name). By reducing or eliminating the potential benefit to directors, there is less incentive for them to abuse the phoenix company arrangement.
The only cost of this proposal is that a director of a company in liquidation will not be able to re-use the name of the company. There may be a cost to companies in liquidation because they will lose the goodwill (if any) in their company name if a director of the liquidated company is involved in the new company. This is a one-off cost because it will only arise when a company goes into liquidation. Even then the loss of goodwill will only be incurred if there is in fact any goodwill in the company name and if a director of the company in liquidation is involved in the new company.
It is difficult to provide an estimate about the impact that this cost may have. There are no figures kept on how many directors of companies in liquidation begin a new company using a name similar to that of the company in liquidation.
The second proposal is that criminal penalties be available to the courts where directors are shown to have acted in bad faith to defeat the legitimate interests of creditors. This would be likely to increase deterrence by making directors significantly worse off if they have initiated a transaction in a deliberate effort to defeat the legitimate interests of creditors. It would also give the Government (through the Registrar of Companies) primary responsibility for enforcement, as opposed to the current reliance on private action.
The disadvantage of this option is that it may discourage directors from taking sensible business risks, perhaps to the point where it disadvantages the company and its creditors. Another disadvantage is that the number of successful prosecutions may be low because of the requirement to prove facts beyond reasonable doubt. There may be extra costs imposed on the Companies Office, but it has not been decided whether these costs will be absorbed or whether the Ministry of Economic Development will seek additional funding.
These proposals will not, by themselves, eliminate the abuse of phoenix company arrangements, but they will assist to reduce the potential for such abuse.
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