After all these years, why exactly do phoenix businesses continue to have such a rotten reputation? Perhaps it is true to say that some directors have deliberately forced their businesses into insolvency in order to buy back the assets at a reduced price while absolving their responsibility for the liabilities. The Insolvency Act 1986 has made it far more difficult for directors to do this, with stricter rules over the insolvency process and who can become a Liquidator. The Liquidator must ensure that the best price is obtained for a business and its assets.
“Not all legitimate businesses succeed at the first attempt, indeed one in three businesses fail within the first three years. Although firms can fail for any number of reasons, there are occasions when totally honest people find they can no longer trade out of their difficulties. It is in such cases that the phoenix company arrangement can allow a business to start again and for the profitable elements of the failed business to survive, offering some continuity for both suppliers and employees. Whereas the vast majority of phoenix businesses are perfectly legitimate, the phoenix arrangement becomes less savoury when in a minority of cases, directors abuse the arrangement by transferring the assets of a failing business at less than market value before insolvency, thus reducing funds available to creditors when the original company becomes insolvent” said Gerald Irwin of Sutton Coldfield based Licensed Insolvency Practitioners and Business Advisers, Irwin Insolvency.
The Insolvency Act 1986 gives the liquidator a number of powers to stop those who abuse the system which include allowing the Liquidator to take recovery action where the failed company has entered into a sale at a lower than market value at a time when the company was unable to pay its debts. Additionally, the Act makes it an offence for a company director, who has been a creditor of a company which has gone into insolvent liquidation, to be a director of a company with the same or a similar name, or concerned in its management, without leave of the Court within 5 years after the winding up. Any director contravening the Act may become liable for the debts of the new company should that subsequently fail.
Under the 1986 Company Directors Disqualification Act, the Courts can disqualify directors whose companies have failed as a direct result of their misconduct, for periods up to 15 years. This will disqualify the person from being a director of a company, acting as receiver of a company’s property and being concerned or taking part in the promotion, formation or management of a company. Said, Mr. Irwin, “Similarly, when a Bankruptcy Order has been made against an individual, he or she must obtain the Court’s permission before becoming a member of a limited liability partnership or acting as a director of, or directly or indirectly taking part in or being concerned in the promotion, formation or management of, a company for the duration of the Order.”
For the duration of the Order, that person is known as an un-discharged bankrupt. Legislation, introduced in April 2004, gave the Official Receiver power to apply to the Court for a Bankruptcy Restrictions Order against any bankrupt who he believed to have been dishonest or in some way to blame for his position. These Orders can last for between 2 and 15 years and have the effect of continuing to apply the restrictions of bankruptcy after discharge. Phoenix businesses will, however, continue to rise from the ashes and certainly without any further interference.