"Rising from the ashes..." Article by Steve Marsten

I often read with interest the collapse of various companies and businesses in the region. It’s often a very stressful time for the owners. However it’s also stressful for the employees and creditors of those companies. The problem you hear and see however is - the business continues to operate as if nothing really changed. If you think it’s a rarity – it probably happens more often then not. As a creditor you may not even know other than being advised of a new bank account number and perhaps the subtle change of an ABN as well.

Now these business people are not breaking the law – presumably, as many of the issues are moral rather than legal issues.

The director of a “phoenix” company will only be automatically liable (under the “phoenix” rules) for the relevant debts of the new company (i.e. the “phoenix” company). For example:

 ■Company A Ltd collapses and goes into liquidation owing $1m.

 ■Either before or within 5 years of the collapse, a director of Company A Ltd starts up a new company with a similar name, “Company A Technology Ltd”, and starts doing business out of the new company, apparently leaving unsecured creditors of the old company up the creek.

 ■Company A Technology Ltd will likely be a “phoenix” company.

 ■The director will be personally liable for relevant debts (which has a particular meaning) of the Company A Technology Ltd (i.e. the “phoenix” company) if it fails.

 ■But the director will not be liable for the $1m of debts of Company A Ltd (i.e. the original, failed company).

 So the “phoenix” rules effectively give directors of “failed companies” (note there is a particular definition of that term) what some may consider a free pass on debts of their first company (although they may be liable to fines – see below – and there are also numerous other company law liabilities that may arise and result in personal liability; these are very selective thoughts only). That is the nature of limited liability companies, which are essential for modern commerce.

This does not give any creditor or employee that much comfort however it’s the law we have. At Sothertons we assist creditors with strategies to limit the exposure to these companies. Call Steve or Tina on 4972 1300.