How to Identify an Insolvency Scam

Whether you’re a company or an individual, insolvency ultimately leads to an individual voluntary arrangement, company voluntary arrangement, or bankruptcy. Any such endpoint will protect those in trouble from their creditors, and may result in the creditors losing some of the money they are owed.

For those who have genuinely hit hard times, these are very worthwhile processes that can aid their financial rehabilitation whilst salvaging something for those they owe. Facing insolvency is not pleasant for most of us. For those less scrupulous, the end results may present an opportunity.

Fraudulent Practices in Insolvency

There are several ways in which the insolvency process is open to abuse. The most obvious is when a company attempts to trade while insolvent. Insolvency is a legal state when a company or individual’s liabilities outweigh their assets, and they’re unable to continue paying their bills. Whether or not insolvency has been officially declared, knowingly trading in those circumstances is unlawful. If it’s a company involved, the directors may become personally liable for the debts incurred.

Rise Like a Phoenix

Trading while insolvent is one thing, but there are those who would go to greater lengths to avoid their responsibilities. The mythical phoenix is a bird that dies in flames, before being reborn out of its own ashes. A phoenix company operates in a similar way.

When a company runs into difficulties, the directors transfer assets and viable business into another company with a similar purpose, in order to continue business as usual. They leave the old company to become insolvent, taking all the debts with it.

The practice of forming a new company out of the ruins of the old is quite legal in the UK, but it can also be used by dishonest directors to avoid paying off creditors, or to sidestep employment legislation.

How to Spot an Insolvency Scam

Using a phoenix company as a means of circumventing insolvency is fraud. If assets are removed from the original company shortly before it becomes insolvent, there are fewer resources available to pay off creditors and staff. If you’re owed money by a company that has been declared insolvent, there are things you can do to protect against this kind of action.

Do some research into the directors of the company that owes you money, and look out for any new companies that have been set up in their names. Don’t give up on your claim even if the phoenix company denies liability.

Another sign is if your company has given trade credit to a company that has declared insolvency within a short period afterwards. Be particularly wary if you’re owed money and nobody is responding to any communications you make. This suggests that everyone’s cleared out and moved elsewhere.

If such a situation arises, inform the Financial Conduct Authority or the Insolvency Service promptly.

Not So Sure?

Find out more about all aspects of insolvency by calling Irwin Insolvency on 0800 2545122 (free from landlines and mobiles). We offer good, impartial advice whether you’re facing difficult financial conditions yourself or dealing with customers who are insolvent.

Contact Irwin Insolvency today for your free consultation

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency,
 rescue and turnaround.