A Broken System: The Harsh Reality for Creditors

In today’s business environment, small businesses, contractors, and sole traders are increasingly falling victim to a legal loophole that enables company directors to sidestep their financial obligations—legally. The scenario is all too common: a company racks up debt, fails to pay its suppliers and service providers, then goes into liquidation. The next day—or even the same day—a new company is registered, often with the same directors, the same staff, and sometimes even the same clients and assets. Meanwhile, creditors are left to pick through the ashes.

This practice, often referred to as “phoenixing,” is a scourge on the integrity of the corporate landscape. It erodes trust, destroys livelihoods, and renders the concept of fair dealing meaningless.

What Are the Current Rules in New Zealand?

New Zealand company law, particularly under the Companies Act 1993, provides a director with broad powers to trade and manage a business. However, these powers are supposed to be balanced with duties owed to creditors—especially when a company is insolvent or nearing insolvency. These duties include:

• Section 131 – Acting in good faith and in the best interests of the company.
• Section 135 – Not agreeing to business that would create substantial risk of serious loss to creditors.
• Section 136 – Not agreeing to obligations unless there are reasonable grounds to believe they will be met.

Despite these duties, enforcement is weak, and penalties are rare. Directors can resign before a company collapses, avoid personal liability by hiding behind the corporate veil, and start a new entity free of past debts. Liquidators may pursue legal action against them for breaches of director duties, but the costs are high and recoveries uncertain.

The Safe Harbour Loophole

COVID-era “safe harbour” provisions temporarily shielded directors from personal liability if companies were affected by the pandemic. While these have now expired, their legacy lingers: directors have become more emboldened, with many now treating liquidation as a business tactic rather than a failure to be avoided.

Phoenixing: A Legal Yet Immoral Game

The phoenixing model is particularly damaging. Here’s how it often plays out:

1. A company builds up significant debt.
2. Directors transfer key assets—like customer contracts, IP, or plant and equipment—to a new company they also control.
3. The original company is placed into liquidation.
4. The new company resumes trading, debt-free.
5. Creditors of the first company get little or nothing—sometimes not even a phone call.

Although the practice may technically comply with current legal requirements, it often breaches the ethical duties owed to those who supplied goods, services, or loans in good faith.

The Toll on Creditors

The impact is devastating. Small businesses waiting 30, 60, or 90 days for payment suddenly find they are out of pocket. Chasing money through the courts is expensive and slow. Even when creditors win, they rarely recover the full amount—if anything. Liquidators may prioritise secured creditors or themselves. Unsecured creditors—usually the small operators—are left with empty hands.

Worse still, many suppliers feel forced to continue working with the “new” company out of economic necessity, essentially rewarding bad behaviour.

The Untouchables: Unfit Wholesale Funders Evading Scrutiny

Adding to this financial minefield is the unchecked rise of unfit wholesale funders—entities that raise capital from wholesale investors under exemptions in New Zealand’s Financial Markets Conduct Act 2013. These funders often escape the regulatory scrutiny that retail financial institutions are subject to, yet they manage large sums of investor capital with little transparency and minimal accountability.

In theory, wholesale investors are “experienced” and capable of assessing risk. In practice, many are simply excluded from protections due to arbitrary asset or income thresholds, not because they are financial professionals. When these funders misappropriate or misuse investor money—diverting it into related-party transactions, failed ventures, or outright fraud—there is often nowhere for investors to turn.

Here’s what typically happens:

1. The funder markets an attractive investment—secured, high yield, exclusive.
2. Investor funds are pooled and directed into questionable or opaque schemes.
3. No real oversight or audited reporting is provided.
4. When losses mount, excuses flow and communication dries up.
5. The funder places the company into liquidation or voluntary administration—leaving investors with nothing.
6. The same individuals reappear under a new banner, starting again.

The Financial Markets Authority (FMA) and Companies Office are often limited in their ability to act unless there is clear evidence of criminality or breaches of law. Civil recovery is left to the investors themselves—forcing them to battle, at their own cost, in a legal system where success is rare and justice is slow.

Regulatory Gaps and Deafening Silence

The regulatory silence is deafening. Despite warnings from affected investors and whistleblowers, regulators too often defer or delay, citing jurisdictional limits or resource constraints. The lack of real-time intervention or proactive investigation allows bad actors to repeat the same pattern—misrepresent, mismanage, and disappear.

While major banks and licensed institutions face strict oversight, these rogue funders operate in the shadows, immune to meaningful accountability. The result? Ordinary investors—many of whom are trusting families, retirees, or professionals—suffer irrecoverable losses while the perpetrators walk away unscathed.

What Needs to Change

To protect honest businesses and restore integrity to the market, stronger legal and regulatory action is essential. Possible reforms include:

• Director bans for those involved in phoenix activity or repeated funder collapses.
• Mandatory disclosure regimes for all wholesale funders above a certain capital threshold.
• Compensation schemes or insurance requirements to protect investors.
• Real-time enforcement powers for regulators to freeze accounts or halt offers in progress.
• Cross-agency coordination between FMA, Companies Office, SFO, and IRD.

Conclusion: Justice Demands More Than Silence

The current system rewards avoidance, punishes honesty, and allows unscrupulous directors and funders to recycle failure into opportunity—at everyone else’s expense. It’s time for legislators, regulators, and the business community to demand accountability and fairness.

Creditors shouldn’t have to fight tooth and nail for what they are rightfully owed. Investors shouldn’t be left penniless while perpetrators rebrand and repeat. Justice means more than words—it requires action,