New company, same name, but the debts are history

A prominent mortgage broker has liquidated her company and created a new one under the same name, leaving behind a court-ordered debt to a former contractor.

Sue Tierney, president of Auckland Property Investors Association and founder of well-known mortgage broker Mortgages by Design, placed her company in liquidation on December 23, two weeks after changing its name to PIN Ltd.

On December 7, the day of the name change, Tierney formed a new company called Mortgages By Design. Both companies had the same registered address and the same ownership structure, with each owned by a trust associated with Tierney, who was also the sole director.

It's a classic phoenix company arrangement, so-called because a new company rises from the ashes of the old and continues on with the same business under the same name and management as the previous company, but usually without any ongoing obligations to the previous business.

The liquidator's report for PIN Ltd (formerly Mortgages by Design) states that the company had debts of $421,895 and no assets.

"It is unlikely there will be a distribution to creditors," the report said.

According to the report, the company struck financial difficulties when it lost a court battle over money which a contractor claimed it was owed.

"The company traded as a mortgage broker and was subject to a claim by a former contractor. Ultimately, the court found in favour of the claimant, however the company is not able to meet the debt awarded by the court. The shareholders concluded that the company be placed into liquidation," the report said.

The size of the debt was not given, although the report notes unsecured creditors were owed $70,000.

The use of phoenix companies to continue operating a business which has become insolvent has long been a sore point with creditors who often miss out on money they are owed under such schemes.

Two years ago the government amended the Companies Act to discourage the use of phoenix companies. The changes made directors and managers of phoenix companies potentially personally liable for the new company's debts and, in some circumstances, also liable for fines of up to $200,000 or a prison term of up to five years if the process was abused.

But the legislation also allowed directors of phoenix companies to be exempted from those sanctions, provided they acquired the business of the failed (predecessor) company from its liquidator and advised the creditors of the failed company of the new arrangements.

Tierney said she had never heard of phoenix companies and did not know what they were, or that the liquidators of PIN Ltd had issued a report on its liquidation.

She referred all questions to PIN's liquidator, Jeff Meltzer of Meltzer Mason Heath.

Meltzer said he always advised his clients in such situations to write to their creditors and advise them of what was happening.

"What one should do [as a director of a phoenix company] to protect oneself, is write to all of the suppliers and say we have acquired the assets of the old company and are trading under the same name, to put everybody on notice about what's happened. That's the steps for a prudent director," he said.

Sunday Star Times