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Phoenix Companies Unveiled
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A phoenix company is described by the Insolvency Service as the practice of carrying on the same business or trade successively through a series of companies where each becomes insolvent in turn. Each time this happens, the insolvent company’s business (but not its debts) is transferred to a new, similar ‘phoenix’ company. The insolvent company then ceases to trade and might enter into formal insolvency proceedings.
Companies fail for many reasons and it is not always due to misconduct. For this reason the law allows business owners, directors and employees to set up new companies and carry on a similar business.
Phoenix companies are not usually favoured by trade creditors and it’s easy to see why. It may seem that a director is walking away from an insolvent company to a new company free of the burden of any debt and the creditor may receive little return once the insolvency proceedings are over.
In some cases creditors may benefit from the sale as a new healthier company eager to trade successfully and may pick up the contracts the insolvent company left behind, potentially forming a stronger trading relationship with creditors.
Without doubt the phoenix company process can be exploited and we spoke to James Linton, Head of Creditor Services PKF Littlejohn Advisory who explained the potential penalties to directors found guilty of misconduct in relation to a phoenix company. “If a sale takes place to a successor company prior to and outside of a formal insolvency procedure, then the Official Receiver or an insolvency practitioner will have a duty to investigate it. If they find assets transferred / sold at an undervalue or director misconduct, then they have the powers to undo and reverse transactions, look to reclaim assets, and look into the conduct of the directors who may then become personally liable for the company debts.”
There are certain rules in these circumstances that should be followed and they include:
What’s crucial to note is that this process is not illegal as long as certain rules are followed:
- Director Qualifications: The director must not be disqualified or bankrupt.
- Fair Asset Valuation: Assets must undergo professional valuation, and a fair market value must be paid.
- Personal Funds: Assets must be purchased with the director’s personal funds.
- Transparent Marketing: A variety of marketing methods must be employed to advertise the pre-pack sale.
- Creditor Notification: Creditors must be informed of the pre-pack sale in a timely manner.
- Full Disclosure: The insolvency practitioner must provide a full disclosure of all actions taken.
- Director Investigation: Directors must undergo a thorough investigation to ensure transactions were in the interests of creditors.
- Company Name: The new company name must not mislead the public or creditors.
For more information on phoenix companies, check out this link provided by the Insolvency Service. Phoenix companies and the role of the Insolvency Service – GOV.UK (www.gov.uk)
