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PREVENTING ABUSE OF THE PRIVILEGE OF LIMITED LIABILITY

In 2000, the Company Law Review Steering Group described4 an alternative form of phoenix in which, prior to the winding up of the original company, its controllers cause it to transfer its assets (probably on terms favourable to themselves, such as at an undervalue or for deferred consideration or in circumstances where no payment is made for goodwill) to a new company which they (or substantially the same managers) also control. They then permit the original company to go into liquidation and the liquidator is unable to take any effective action for lack of funds. Alternatively, the old company may simply be allowed to be struck off the register without any liquidation. The Steering Group observed that the phoenix syndrome creates problems for the creditors of both the old and the new companies, competitors of either and the general public. The old company’s creditors are at risk of sale of its assets at an undervalue. The creditors of the new company may be duped into dealing with it, thinking it still to be the original business in a financially healthy state, or they may be unaware that the same incompetent or dishonest directors are managing the second company. Competitors suffer from the ability of the business to abandon its creditors and continue trading unburdened. The Group did also recognise that there were both ‘good’ and ‘bad’ phoenixes; there are occasions where honest individuals may, through misfortune or naïve good faith, find that they can no longer trade out of their difficulties and that the only way to continue an otherwise viable business may

1 In Chapter 45, which is entitled ‘Delinquent directors and others’. 2 Paragraph 1741. 3 See Re Keypak Homecare [1987] BCLC 409 at 411 for a judicial description of this syndrome.