By Cameron Cooper

Lessons from Australia may prove invaluable, as New Zealand seeks to close legal loopholes and crack down on dodgy company liquidations.

As part of proposed reforms to modernise the Companies Act 1993, New Zealand is targeting illegal phoenixing, a scenario whereby assets of a company are moved, leaving only debts. When the business is liquidated or wound up, there are no assets to pay creditors. Meanwhile, using the assets, the directors start a new company and continue to do business without paying off past debts.

If passed, the New Zealand changes will include the introduction of a unique identifier for company directors. This move mirrors the introduction of Director Identification Number in Australia in 2021, as part of a package of reforms that are designed to address illegal phoenix activity in Australia.

Wellington employment lawyer Barbara Buckett, principal of BuckettLaw, welcomes the proposed New Zealand reforms, noting that illegal phoenixing often results in employees missing out on wages and other entitlements, while suppliers and sub-contractors can also go unpaid.

“We can go all the way through a matter and get the judgment of a court, and then we can’t enforce it because the company goes under. That can’t be palatable. You rob, by some sort of legal fiction, people’s benefits and entitlements,” says Buckett, who believes the suggested reforms are a “starting point” for a fairer system.

“With the last two restaurants, the owner ended up getting his employees to be the directors of the company and it was very obvious that they didn’t have a clue what they were doing.”

Growing problem

The legislative package is led by the New Zealand Ministry of Business, Innovation & Employment (MBIE). MBIE figures reveal that New Zealand cases of phoenixing have jumped in the past five years, up from five in fiscal 2020–2021 to 23 in fiscal 2023–2024. Many instances occur in the construction and labour-hire sectors because of complex subcontracting chains, the prevalence of cash payments, competitive pressures and frequent insolvencies.

John Fisk FCA, a business restructuring services leader at PwC New Zealand, broadly supports the Companies Act revamp, including new director identification rules, but he does not think they will be “a panacea to stop phoenixing and creditors being left out of pocket”.

Fisk says illegal phoenix activities in New Zealand often involve owner-managed businesses in the construction sector that are in debt to IR, rather than everyday creditors.

“It’s very easy to set up a company in New Zealand and what we see is when a business has failed, it’s started up again under a new name that is completely separate to the old name but with the same director behind it,” he says. “The company usually can’t get credit from a bank, so they effectively start using Inland Revenue as their financier.”

In one case, Fisk says a restaurateur went through three iterations of a company that was exactly the same restaurant. “With the last two restaurants, the owner ended up getting his employees to be the directors of the company and it was very obvious that they didn’t have a clue what they were doing.”

Red flags

How does illegal phoenixing differ from legitimate company restructuring? The former involves deliberately moving assets to avoid debts and restarting the business under a new entity, whereas legitimate restructuring follows legal processes to reorganise finances or operations.

Jill Muir, senior policy advocate for business reform at CA ANZ, says it is clear that the restructuring of a struggling company is “quite acceptable” when done ethically. She notes that Australia amended its Corporations Act 2001 in 2020 to introduce creditor-defeating dispositions. These stop arrangements a debtor may make with the primary intention of preventing, hindering or significantly delaying creditors recovering their debt.

“It’s obvious to anyone in the space when it happens because directors move assets but not debt,” Muir says. “But it’s hard to enforce by regulators or take it to court as directors are changed, masking the trail.”

Kare Johnstone FCA, a partner at advisory and restructuring firm McGrathNicol in New Zealand and chair of the Restructuring Insolvency & Turnaround Association New Zealand (RITANZ), says legitimate restructuring of a business often involves a creditor compromise whereby a struggling business agrees to pay back their debt in part or in full over a certain period.

“But phoenixing is really a deliberate act where you have a director who effectively knowingly tries to shift assets and or the business to a different entity to ultimately avoid liabilities,” she says.

For accountants seeking to avoid any association with illegal phoenixing, there are some typical company behaviours that are red flags. For example, the suspect business may have company directors who have been linked previously with liquidated entities, they may issue quotes that are significantly lower than market value, and they may make changes to a company’s directors and the company’s name, even while the manager and staff remain the same.

Muir says CA ANZ members are well versed in spotting potential financial pressure that clients are experiencing. “That’s certainly our members’ role but it can result in their client seeking quick solutions to avoid paying debt.”

“If you’re transacting with an organisation, you want to make sure that you know there are real people behind it and that it’s not a sham or a front for other criminal activity.”

Following Australia’s lead

A central feature of the New Zealand changes is the introduction of a unique director identification system, a tool that targets rogue directors and makes it harder for them to hide their involvement in multiple failed companies.

Mirroring Australia’s Director ID scheme, each director and general partner will be assigned a Corporate Role-holder Identifier (CRI) that enables authorities, creditors and business partners to track their company associations.

The Australian Institute of Company Directors (AICD) has been a strong advocate of the Director ID initiative in Australia, although it acknowledges some negatives with the rollout of the program that have included the imposition of administrative costs for companies.

“But it’s been worthwhile,” says AICD head of policy Christian Gergis, who notes prior to the Australian changes, Labor politician Andrew Leigh had stated in a 2017 media release that “you can almost register your dog as a company director”.

“There weren’t the kind of checks that you would expect in the past,” Gergis says. “If you’re transacting with an organisation, you want to make sure that you know there are real people behind it and that it’s not a sham or a front for other criminal activity.”

One concern that the AICD has about Director IDs, given modern cybersecurity and privacy concerns, is the public availability of a wide range of directors’ personal information on Australia’s company and business names register database, including directors’ date of birth and residential address.

“Directors have been expressing concerns about that and it’s been a long-running issue,” Gergis reveals. “We’d like to see as part of future reforms that some of this detailed personal information is removed.”

Worthwhile move on IDs

Johnstone believes the New Zealand director identification changes have the potential to make a difference.

“One of the frustrating things as an insolvency practitioner is when you’re trying to identify the directors or owners of a company and there are inconsistencies with directors’ names,” she says. “So, the use of unique identification numbers is a positive step that enables consistency in tracking directors of a company. You can see the number of entities that the director currently has or has had in the past.”

She also supports the move to extend the clawback period for voidable transactions – that is, transactions relating to payments or assets that occurred while the business was insolvent – to four years from the current two.

Nevertheless, Johnstone says the key to the success of the reforms will be enforcement. “The proof will be in the pudding. It’s great that we’re looking at how we can mitigate risks of phoenixing happening, but it’s about making sure that we have the resources available to follow through with enforcement on an appropriate case-by-case basis.”

Muir agrees that “the big issue is enforcement” if any new laws are to be meaningful.

The way forward

As Fisk considers the looming changes, he backs the director identification rules, as well as provisions attacking undervalue transactions.

However, with IR overdue debt rising from about NZ$4 billion during COVID-19 to about NZ$10 billion today, he believes the focus should be on identifying companies in financial trouble earlier and stopping them running up large debts, especially given that the chance of recovering a debt once it gets over three months drops significantly.

“Collecting debts that are overdue quicker and doing something about it is going to help stop phoenixing-type activity because you stop the business in its tracks. So, how do Inland Revenue and other creditors keep on top of their debtor books? That’s actually the first thing that needs to happen.”

For her part, Buckett encourages inter-agency data sharing to cast a wider net for dodgy operators “and increasing the civil liability for directors who breach duties”.

At McGrathNicol, Johnstone is confident the proposed Companies Act measures have the capacity to make a genuine difference to minimise illegal phoenixing. She encourages suppliers and customers of businesses to ramp up their due diligence as part of efforts to stymie abuses.

“The key thing for stakeholders is going beyond just looking at Companies Office [information],” she says, referring to the government agency responsible for administering New Zealand’s companies register.

“It’s important to do a thorough background search on a company and any directors, so you can get a feel for how many entities that individual has been a director and/or shareholder of and see if they have been involved in any form of insolvency. Insolvency reports in New Zealand are filed online at the Companies Office.

“Also, AI and Google searches are powerful tools to research your supplier or customer before you do business with them.”

---