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Proposed reform to the Companies Act is a step in the right direction to prevent companies from illegal phoenixing but more needs to be done, advocates and lawyers say.
Employment law advocate May Moncur said several clients had yet to receive compensation following a ruling in their favour by the Employment Relations Authority after their former employer went into liquidation.
Moncur recognised there were legitimate cases in which liquidation was needed, but some owners intentionally avoided liability by declaring bankruptcy and forming a new company with the same leadership.
"These 'false liquidations' are often voluntary," Moncur said. "It's a low price an employer pays to avoid their liabilities such as mental or wage compensation or penalties."
May Moncur Photo: The Detail/Sharon Brettkelly
A director of a failed company must not for a period of five years from the start of the insolvency be a director of a phoenix company, according to the Companies Act.
Statistics from the Ministry of Business, Innovation and Employment (MBIE) showed the number of complaints made to the Companies Office about phoenixing had increased over the past five years, from five complaints in fiscal 2020-21, to 23 in fiscal 2023-24 and six to date in fiscal 2024-25.
Last August, the government announced its intention to reform the 1993 Companies Act.
The proposed changes included the introduction of a unique identifier for company directors and general partners that would be helpful in preventing illegal phoenixing.
Gillian Sharp, manager of corporate governance and intellectual property policy at MBIE, said a bill would be introduced to Parliament in the second half of 2025.
The reforms should make compliance simpler for New Zealand businesses while helping deter and detect poor business practices, including phoenixing, Sharp said.
"Better identification, information sharing and enforcement are likely to be the best approach to improve combatting harmful phoenixing and other poor business practices," she said.
The introduction of identification numbers for directors would make it easier to track all companies, past and present, that had been associated with a specific director, she said.
"This will make it easier for government agencies to identify poor practices and sanction directors," she said.
"It will also make it easier for other individuals and companies to do their due diligence on directors to decide whether or not they want to do business with them."
Filling the gap
Employment lawyer Barbara Buckett said there had been "far too many" examples where people have escaped liability because of the loophole in the legislation.
"People go into liquidation to avoid the liabilities and then they rise as phoenix in another form ... or they hide behind the corporate structure," she said.
"What they do is rendering a win in the authority or the court meaningless, and then ... there's no entity left to get compliance against."
She said the proposed introduction of an identifier for directors would help.
"It's certainly going to make sure that there's some teeth there and some accountability because people shouldn't be using a corporate entity or companies to try and defeat other person's legitimate rights, entitlements and, in other words, using it to get away with it."
She said the regulatory body of companies needed to do more checking if an employer couldn't meet their obligations, and they should not be trading in the first instance, let alone being allowed to go into liquidation.
Scott Moran Photo: Supplied
However, commercial lawyer Scott Moran said the proposed identifier could be helpful but lacked real teeth.
Moran said it was unusual for companies to liquidate to avoid liabilities as directors could potentially face personal liability.
Although it might make it easier to track directors, people who wanted to evade liability by liquidation could always appoint another person in the role - for example, a relative.
"This type of thing in general is probably best addressed through directors' duties as this is where directors are the subject of liabilities and responsibilities that they cannot escape by resigning or winding up the company," Moran said.
"Directors' duties are going to be reviewed and considered this year by the Law Commission and there will likely be wider implications and reforms as a result," he said. "These reforms could relate to phoenixing, among other things."
The commission was expected to begin an independent review of aspects of the Companies Act, examining directors' duties and liability, sanctions and more effective enforcement.
Commissioner Geof Shirtcliffe said although the review wasn't looking into anything specific in relation to phoenix companies, that might come within the scope of their review.
