1. Phoenix companies

Phoenixing, or phoenixism, are terms used to describe the practice of carrying on the same business or trade successively through a series of companies where each becomes insolvent (cannot pay their debts) 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 (liquidation, administration or administrative receivership) or be dissolved.

2. The law in relation to phoenixing

Companies can fail, be dissolved or face financial difficulties for a variety of reasons apart from misconduct.

So, the law allows owners, directors and employees of insolvent or dissolved companies to set up new companies to carry on a similar business. This is as long as the individuals involved are not personally bankrupt or disqualified from acting in the management of a limited company.

When a company goes into administration or liquidation, the administrator or liquidator will try and get in as much money as possible to pay creditors. Sometimes the best offer will be from the former directors or owners to buy back part or all of the business, including the company’s name or trading name. This is sometimes called a ‘pre-pack’ administration. The law allows this.

However, generally, when a company enters liquidation (this is often referred to as being wound up), insolvency law restricts who can reuse the company’s registered name and trading names.

Unless any exception applies, anyone who was a director in the 12 months before the company went into liquidation is banned from taking part in the management of another business with the same name. This ban lasts for 5 years and also covers names which are so similar they suggest an association with the previous company. More information on the restrictions on re-using a company name after insolvent liquidation and details of the exceptions that allow it.

3. The Insolvency Service’s role

Some companies fail because of director misconduct. It’s our role to investigate suspected cases of misconduct and take action against those who have acted against the public interest.

When a company enters into formal insolvency proceedings, such as liquidation or administration proceedings, the proceedings are managed by an insolvency professional. This is either an insolvency practitioner or an official receiver. They will review the company’s affairs and look at the conduct of the directors. If they suspect possible misconduct, they must confidentially report their concerns to the Insolvency Service for investigation. There is more information about our insolvent company investigations.

If a company has been dissolved, complaints about the conduct of a company’s directors can be made to the Insolvency Service. We have discretionary powers to investigate where it’s appropriate. More information about our dissolved company investigations.

We also have discretionary powers to investigate the affairs of companies that are not in formal insolvency proceedings and have not been dissolved if we suspect there might be serious misconduct in the company. More information about our live company investigations.

If we find evidence of unfit conduct, the Secretary of State has the power to seek a director’s disqualification where it’s in the public interest and there is sufficient evidence to satisfy the court.

4. What we cannot investigate

We cannot use our powers to investigate or resolve individual commercial disputes between companies and their employees, customers, creditors or shareholders. For example, where the complaint is about:

not paying an individual creditor (such as a customer or supplier)
not paying an employee’s wages
not providing a customer with goods or services that they have paid a deposit for
supplying a customer with faulty goods
decisions made by directors that a shareholder disagrees with

These examples are not usually evidence of unfit conduct and are generally considered to be consumer or commercial issues. However, they might be taken into account if they are part of a larger pattern of unfit behaviour.

The main purpose of our investigative powers is to protect the general public and the business community. Individual disputes like those listed must be settled without our involvement. If necessary, you should get independent legal advice to resolve these issues.
5. Director misconduct

Examples of the types of behaviour that can lead to a director’s disqualification include:

fraudulent behaviour
not submitting tax returns or paying tax and any other money due to the Crown
continuing to trade to the disadvantage of creditors at a time when the company was insolvent
conduct that deliberately removes assets that should have been available to pay creditors
letting somebody else run the company for the director
not making sure the company is run properly
not keeping or producing appropriate accounting records
not preparing or filing accounts at Companies House
not filing annual returns at Companies House
not complying with other regulations
not co-operating with any official receiver or insolvency practitioner appointed to the company

You can complain to the Insolvency Service, Companies House or the Serious Fraud Office if you suspect a limited company or its directors of fraud or serious misconduct.
Back to top

--------------------------------------------------
Note added at 12 hrs (2024-05-06 20:27:34 GMT)
--------------------------------------------------



Group Sites
Eddisons
Springboard
MAF Finance Group
Pugh & Co
Ernest Wilson
BTG Advisory
Mantra Group
Investor Relations
People Search
International
Assets For Sale
Our Futures
Search Site

Begbies Traynor Group

About Us
Our Services
Sectors
Media Centre

Begbies Traynor Group

Home

About Us

Our Services

Sectors

Media Centre
International
Investor Relations

Copyright 2024 © BTG
What is a Phoenix Company and the rules around this process?

What is a Phoenix Company and the rules around this process?
Date Published: 18/10/2023
Understanding a phoenix company and the legal implications

A phoenix company describes a business that has been purchased out a formal insolvency process such as administration or liquidation, often by the existing directors. The term refers to a phoenix rising from the ashes, but there are strict rules that govern the use of this process.

It is not possible for directors of an insolvent company to choose this route without clear evidence that creditor interests will be maximised. This should be the main consideration for any insolvent company - the insolvency practitioner appointed to oversee the administration or liquidation process is obliged to recoup as much money as possible for unsecured creditors.
What are the rules governing phoenix companies?

When considering the returns for unsecured creditors, it is clear that the underlying assets of the old company should be sold on at a fair price and not at an undervalue. This also avoids accusations that directors have simply walked away from the company’s debt.

Professional valuations should be attained, and clear records kept during the decision-making, valuation, marketing and sale of the old company. The ethics of this process have come into question in the past, and some sales have been successfully challenged in court by creditors.

A phoenix company can only come about should the original company have no hope of survival. This can only be determined by a licensed insolvency practitioner. Begbies Traynor offer professional guidance on this and other routes out of insolvency, and are available for appointment as administrators.
How is the phoenix company purchased?

Assuming the purchase is by connected parties such as existing directors and/or shareholders, the buyers may need to purchase the company using their own personal funds if no other investment is available. In some cases not all of the assets are purchased – for example when the new company needs to streamline its operations.

The money received from the sale is used to repay unsecured creditors. Because employees are an asset of the company, their contracts of employment may be transferred over to the phoenix company under TUPE legislation.

If the valuation of assets means that directors cannot afford to buy them all at the same time, a deferred sale and purchase agreement may be available.
What are the rules of a pre pack sale?

There are strict regulations surrounding pre pack sales, intended to protect the interests of unsecured creditors and prevent company directors from escaping their obligations. These include:

Valuation: professional valuations must be provided, as well as the names and qualifications of the valuers. It is recommended that the services of an auctioneer or Chartered Surveyor are used.
Marketing: a broad spectrum of marketing methods must be used to advertise the pre pack sale. These should include online and traditional media outlets.
Notification: creditors must be notified of the sale as soon as possible, but no later than two weeks following the sale date.
Disclosure: full disclosure of all actions and decisions made by the insolvency practitioner is required within a statement sent to creditors, preferably at the same time as notification of the sale.
Investigation: director conduct must be investigated prior to liquidation, and can cover a period of up to two years prior to the date of insolvency.
New company name: this must not be the same or similar to the old company, as it could indicate an intention to mislead the public or any new creditors.

What are some of the potential issues for a phoenix company?

The ‘newco’ may need to be started using the purchasers’ personal funds if no external investment is available. Liabilities can be significant from the start, including employment contracts transferred via Transfer of Undertakings (Protection of Employment), or TUPE, regulations.

If the old company had tax or National Insurance arrears, it is likely that HMRC will demand upfront deposits from the phoenix company to reduce their exposure to risk. These extra demands can be difficult to meet for a new company, and may delay the start of trade. They may even negatively influence the decision to buy.

If the company goes into liquidation, the trading name of the new company must not be the same (or similar to) that of the insolvent company, subject to certain conditions. The improper use of an insolvent company's name represents a breach of the Insolvency Act 1986, and director's could face imprisonment or personal liability for company debts should they be found guilty of this.
Professional and legal advice

Buying a phoenix company is a complex process, and involves multiple obligations on the part of the purchasers for the sale to be viewed as legitimate. Appointing an insolvency practitioner to determine whether this could be an an option for you and your company is the first step.

https://www.begbies-traynorgroup.com/articles/rescue-options...