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These are trying times for most businesses and many would probably relish the thought of their company rising from the ashes taking on a new lease of life like the mythical phoenix.

While a restructure of your company to give it a new start is allowed, you must be aware that the Companies Act 1993 contains provisions designed to prevent the abuse of what has been called ‘phoenix companies’.

An example of the abuse is the situation of the dishonest property development company that goes into liquidation leaving creditors such as the bank, tradesmen and various suppliers out of pocket. Then soon after, a new company appears with the same name and the same people behind it and trading off any goodwill left in the name but denying all responsibility for the debts of the old company. 

The abuse arises because a company is a limited liability entity so normally its shareholders and directors are not personally liable for the debts of the company (unless the director has been fraudulent or reckless).  Further, the shareholders and directors are free to start up a new company which is also treated as being separate from the old company and not liable for the debts of the old company.  Prior to the introduction of the phoenix company provisions the new company could use the same name as the old company as well.

The Act states when a company is placed in liquidation at a time when it is unable to pay its due debts it is a ‘failed company’.  Then a ‘phoenix company’ is described as one which uses the same or similar name as a failed company either prior to the liquidation of the failed company or within 5 years after the start of the liquidation of the failed company.

If you are a director of a failed company then for a period of 5 years after the start of the liquidation of the failed company, you cannot:

• be a director of a phoenix company; or
• take part in the promotion, formation or management of a phoenix company; or
• take part in the carrying on of a business that has the same or a similar name as the failed company’s pre-liquidation name or a similar name.

If you breach the Act then you are personally liable for all relevant debts of the phoenix company incurred while you were involved in the management and the phoenix company was using a similar name to the failed company.  You might also be banned from being a director of any company for a certain period of time.

The Act does not apply where the business of a failed company is acquired in a transaction with a liquidator, receiver or voluntary administrator.

The phoenix company provisions have been in place since 2007 although there has only been one prosecution. In April 2010 a person was convicted of breaching the provisions and prohibited from being a director, promoter of or in any way being concerned or taking part in the management of any company for 5 years.

The effect of these statutory provisions is that if your company goes into liquidation while it is insolvent then you cannot start up business again using the same name for a period of 5 years. However if:

• you use a different name for your new company; or
• your old company was liquidated while it was solvent (in effect a voluntary liquidation initiated by the shareholders or directors) and able to pay its debts

then the Act does not apply.