The recent High Court decision in Groves v TSSN Limited (In Liquidation)  NZHC 2402, involved the first contested application to the Court for permission under section 386A of the Companies Act 1993 (Act) to be a director and manager of a phoenix company.
Mr Groves was a director of TSSN. In December 2010, a new company, Stepping Stones Nursery Limited (the phoenix company), was incorporated and Mr Groves was appointed as director. TSSN and the phoenix company entered into an agreement whereby the phoenix company purchased the business of TSSN as a going concern. In May 2011, TSSN was placed into liquidation, rendering it a "failed company" in terms of the Act. As a result, Mr Groves was prohibited from acting as a director of the phoenix company without the permission of the Court. Notwithstanding that Mr Groves was aware of the phoenix company provisions shortly after TSSN was placed into liquidation, he did not make an application to the Court for permission to act as a director of the phoenix company until 20 December 2011.
The liquidators of TSSN opposed Mr Groves' application on the basis that the assets of TSSN had been transferred to the phoenix company at an under-value. While the Court found that the evidence was insufficient to establish that the fair market value was obtained, it also considered that Mr Groves' delay in making an application meant that the value of the transaction was not an important consideration. That question should have been addressed in a timely way. The objectives of the phoenix company provisions would be substantially undermined if the Court were to grant the application on the basis of an assessment made now, that at the time when the phoenix company provisions were first engaged, the transactions did not deprive TSSN of value.
Instead, the two principal considerations were:
- The consequences for the phoenix company, and those having dealings with it, of Mr Grove's remaining, or not remaining, as a director
- Whether Mr Groves' conduct in relation to the failed company or the phoenix company made him unfit to be a director of the phoenix company.
The Court accepted that there would be a significant risk of damage to the ongoing business of the phoenix company if permission were not granted to Mr Groves to take part in the management of it. Notwithstanding this, it was not necessary for Mr Groves to remain a director. Further, in light of Mr Groves' awareness of the phoenix company provisions, the Court considered that his continuing to act as a director for seven months before seeking the Court's approval must be viewed as a seriously adverse reflection on his fitness to be a director. Accordingly, the Court refused permission for Mr Groves to be a director of the phoenix company, but allowed him to continue to take part in its management.
The decision is a reminder that strict adherence to the phoenix company provisions is important. Had Mr Groves sought the Court's permission immediately, his application may not have been declined.