Understanding the rules and regulations for phoenix companies

What is a phoenix company?

There has been fierce debate regarding the use of ‘phoenixing’ over the years, but it remains a substantial tool in the rescue process. A phoenix company is formed when an insolvent company’s business is transferred to a new company. The debts remain with the insolvent company, who ceases to trade, enters insolvency proceedings, or is dissolved. Often some or all of the directors remain the same and, in some cases, the new company has the same or a similar name to the failed business. The phoenix company will operate in the same sphere as its predecessor.

Is phoenixing legal under insolvency law?

The term ‘phoenixing’ has negative connotations due to the actions of directors forcing their companies into insolvency and then starting a new company debt free. However, setting up a phoenix company is legal, as long as rules are followed.

Government guidance states most UK companies that fail do not do so because of any wrongdoing. Because of this, UK law allows owners, directors and employees of insolvent companies to set up new companies, known as a phoenix company, as long as the individuals involved aren’t personally bankrupt or disqualified from acting in the management of a limited company.

In these cases, the phoenix company arrangement can allow a business to start again and for the profitable elements of the failed business to survive. This offers some continuity for both suppliers and employees.

Why does phoenixing have a bad reputation?

In the past, the term ‘phoenixing’ was used to describe defrauding creditors. Directors have been known to deliberately force their companies into insolvency to buy back the assets at a reduced price whilst absolving responsibility for the liabilities. However, the Insolvency Act 1986 made it more difficult for directors to do this. In a minority of cases, directors do abuse the phoenix company arrangement by transferring assets of a failing business at less than market value before insolvency, thereby reducing the funds available to creditors when the original company becomes insolvent.

Trading with a Phoenix Company

Whilst the majority of phoenix companies are legitimate, it is the role of insolvency practitioners to investigate why the previous business failed and any suspected cases of misconduct. The reason for doing this is to ensure that the directors are not serial abusers of the phoenix company arrangement. Should the insolvency practitioner suspect misconduct, they are required to confidentially report their concerns to the Insolvency Service for investigation.

Additionally, the Act makes it an offence for a director 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 either leave of the court or by arrangement with the liquidator of the failed company within five years after the winding up.

Any contravention of the Act may render the director liable for prosecution (fine or imprisonment) and in some cases, the debts of the new company if that subsequently fails.

Under the 1986 Company Directors Disqualification Act, the Courts can disqualify directors whose companies have failed as a direct result of their misconduct, for up to fifteen 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. It also disqualifies them from being a member of a limited liability partnership or taking part in the promotion, formation or management of such a partnership.

Terminology

It is important to note here that the term ‘director’ applies to anyone in the position of a director of a company and includes those who give instructions on which the directors of a company are accustomed to act.

Reporting the unscrupulous

There are two measures that can be taken by suppliers to ensure unscrupulous directors are unable to set up new companies. The first measure relies on the creditor of the insolvent company to pass on information of misconduct to the official receiver and insolvency practitioner, to understand why the business has failed. They have a duty to investigate the affairs of companies in liquidation and report evidence of offences to the Department of State responsible.

If, on the other hand, there are suspicions that an individual is acting in breach of a disqualification or bankruptcy order, this should be reported to the insolvency service. It is a criminal offence to contravene a disqualification order and the penalties can be very severe.

  • On conviction of indictment it can lead to imprisonment for up to 2 years and/or a fine [section 13 of the Company Director Disqualification Act 1986].
  • On summary conviction, to imprisonment for not more than 6 months or a fine not exceeding the statutory maximum, or both. [section 13 of the Company Director Disqualification Act 1986].
  • A person can be held personally liable for the Company’s debts for the time he/she acted in breach of the disqualification order [section 15 of the Company Director Disqualification Act 1986].

Need any help or assistance?

Have you set up a phoenix company or have concerns about a director’s conduct? Is your business struggling and you want to assess your options before finalising an agreement? Get in touch with Irwin Insolvency today for expert advice and guidance.

At Irwin Insolvency, we offer a range of insolvency services that could save your business from failure. With our many years of experience, we will be able to provide you with advice and guidance no matter what financial situation you are in.

We have a personal understanding to sympathise with your financial situation and help you explore all your options before making a decision. Our insolvency practitioners are up to date on the latest news and advice, and are ready to help you. Contact Irwin Insolvency today for your free consultation.

To speak to a member of our friendly team, please call us on 0800 009 3173.

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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.