Curbing phoenix companies may cut down liquidations

Proposed law changes making it harder to set up phoenix companies may have an impact on the construction industry, where company liquidations are common.

By June, at least 92 companies in the building sector had gone into liquidation since the start of the year. Companies liquidating can leave subcontractors thousands of dollars out of pocket and customers’ dreams in tatters.

The changes included a proposed director identification number, which would track a director or owner setting up companies under different names. That would in theory make it harder for phoenix activity, in which assets are transferred to a new company, and the old company is wound up and avoids paying creditors.

An estimated 400 businesses a year could be involved in phoenixing at a cost of between $370 million and $600m a year to unpaid employees, creditors and Inland Revenue, the Ministry of Business, Innovation and Employment (MBIE) said in documents released in March.

Illegal phoenixing was a breach of the Companies Act but MBIE noted those prosecutions could only occur if the activity was detected in the first place.

Lower Hutt developer and company director Kevin Melville was a client of Wellington company Armstrong Downes Construction when it collapsed at the start of May and was behind a successful bid to get the original liquidators replaced.

Over the decades he had also been caught up in other liquidations as a subcontractor with his electrical mechanical contracting company NME. ‘‘The subbie is the worst position to be in, you never get anything,’’ he said.

Liquidations were ‘‘sadly quite common’’ in the construction industry. In a small country like New Zealand, companies that cared about their reputation did everything they could not to liquidate and there were many genuine reasons why companies failed, he said.

‘‘Generally, I think everyone deserves a second chance. Sometimes people make genuine mistakes in business and things go horribly wrong for them. From failure comes success. I mean, you make one mistake, you don’t want to be tarnished your whole life for it.’’

However, he said there would always be some people trying to find a way around the rules and it would be very hard to change that.

Michelle Mau, senior associate at Russell McVeagh, said ‘‘phoenix companies and insolvencies generally seem to plague the construction industry. It can be difficult to quickly and accurately find information about all the companies someone is a director for.

‘‘It can also be difficult to distinguish two or more directors who have the same name.’’

Requiring each director to have a unique director identification number was a good idea, as it would hopefully allow the public to detect and avoid falling for such fraudulent behaviour, she said.

It would also allow regulators to more easily identify directors who were breaching the phoenix company rules.

The Companies Act 1993 aimed to prevent directors from abandoning an old company, including its debts and liabilities, and then incorporating a new company with a similar name to effectively carry on the same business and to leverage off the goodwill of the old company name, Mau said.

‘‘However, these provisions are quite limited and do not prevent directors of failed companies from setting up new companies with an entirely different name.’’