What is a phoenix company and are they legal?

‘Phoenixing’ is an unwelcome buzzword in the business community. It occurs when an indebted company is closed through an insolvency process or dissolution but is started again using the same assets and the same or a similar name. 

There is often a negative perception of phoenix companies. Some believe directors use it deliberately in order to leave behind accumulated debt to start again with a clean slate.

Does this mean a phoenix company is illegal?

No, it is a legitimate business transaction. There is a big difference between a director attempting to start a business again and one trying to avoid repaying debt. Business failures occur for many different reasons and often through no fault of the directors. 

UK insolvency law allows existing directors to buy the assets and goodwill of the insolvent company, provided they are paying the market value and are taking responsible action towards the company’s creditors.

What are the rules regarding a phoenix company?

Directors

Directors are able to set up a new business and trade in much the same way as the closed business, provided the individuals involved are not personally bankrupt and have not been disqualified from acting as directors.

Company name

Specific restrictions have been brought in under the Insolvency Act, Section 216 making it a criminal offence to use the same, or similar, name as the company that has entered liquidation for a period of five years (with exceptions). 

Pre-packaged sale

Pre-packaged sale refers to a pre-arranged sale of company assets, usually to the company directors. It is common practice to sell the assets and goodwill of the insolvent company through a pre-packaged sale. 

This can often be the best deal for directors and creditors as the pre-pack is worth more to the directors than on the open market, meaning there will be more funds available to distribute to the creditors.

The pre-pack value will need to be independently proven that it is a reasonable and fair price and the current asset value thoroughly assessed. 

One of the greatest advantages of a pre-pack sale is the rescue of jobs that would otherwise have been lost through the business closure.

When is a phoenix company prohibited?

If a company fails as a result of misconduct of the directors, the Insolvency Service will need to investigate further. If they find evidence of unfit conduct, a director disqualification can be sought. 

The director would then be banned from forming, promoting, or managing a business for a period of between 2 and 15 years.

HMRC rules

Due to the tax debt that inevitably builds through repeated ‘phoenixing’, HMRC has brought in specific guidelines to assess if a director has repeatedly used insolvency to avoid paying taxes. HMRC may also require the new company to provide a bond before allowing VAT registration. 

Not all legitimate businesses are able to succeed. But, if the profitable elements of a company are able to survive in the form of a new business, and the directors of the insolvent company have acted legally, then setting up a new company may be the best result.

There are several matters to consider such as ransom creditors, licensing issues, employees rights and the viability of the phoenix company. If you are considering a phoenix company a free consultation can be arrange to discuss these and other issues. 

Ian McCulloch can be contacted at the Preston office of Opus Restructuring & Insolvency by calling 01772 669860 / 07854 031177 or e-mailing preston@opusllp.com