A Phoenix company is one that forms after the directors of an insolvent company purchase the business and/or its assets in administration or liquidation. The business continues trading as a new entity, so it rises from the ashes a bit like the mythical bird.
Running a business isn’t easy, and there are many reasons why they might run into difficulties. At times, a company might face insolvency. A “phoenix” is one way of carrying on the business but in a different company.
Yes! This process is entirely legal, so long as certain rules are followed and the directors’ actions are not misleading, or are deliberately defrauding creditors.
Phoenix companies do have some negative connotations with trade creditors who are awaiting monies owed and then see their debtors (the directors) starting out again, debt-free!
A phoenix company in this article is not quite the same as a pre pack administration. A pre pack is, by definition, a company going into administration and then the business being sold in one seamless transaction. They are difficult to do and expensive. A phoenix is a new company “new co” (with the same directors) that is formed any time after a liquidation and takes over the business and assets of the old company “old co”. For more information see this page on the differences
Most UK companies hit financial difficulties through no misdemeanour on the part of their directors. The law allows for those involved in the running of a business to launch new organisations engaging in similar work, so long as such persons are not disbarred from directorship or bankrupt themselves.
By forming a phoenix company, the insolvent company’s business is transferred to the new entity, without the transferral of its debts. This can allow directors to salvage a viable business from a failed company.
There are many rules surrounding the setting up of a phoenix company.
When the new company is formed it can’t have the same or similar name to the liquidated company. To prevent directors from misleading the public or creditors, the law imposes a strict restriction on the reuse of a company name after insolvent liquidation.
The Rule: If you were a director or shadow director of the liquidated company in the 12 months before its collapse, you are prohibited for five years from being involved in any new company or business using the old company’s name, or any name so similar that it suggests an association.
Consequences of Breach: Breaching this rule is a criminal offence and can result in personal liability for the new company’s debts.
You may only use a prohibited name if one of the following legal exceptions applies:
Acquisition of Assets (The Pre-Pack Route): The new company acquires all or a substantial part of the insolvent company’s assets via an arrangement overseen by the Insolvency Practitioner. This requires formal notice to be published in the London Gazette and creditors must be informed.
Court Permission: You successfully apply to the court for permission (“leave”) to use the name.
Prior Trading Name: The new company has already been trading under the prohibited name for at least 12 months before the date of liquidation.
To ensure fairness and transparency, especially to unsecured creditors, all assets of the old company must be sold at a fair price and not at an undervalue. Selling assets below their true market value is considered phoenix company fraud and allows the directors to appear to walk away from their debts unfairly.
To protect the legitimacy of the process:
Getting a “correct” market value is vital, as asset sales have been heavily scrutinised in the past, leading to some transactions being successfully challenged in court by creditors.
The insolvency practitioner will be the liquidator of the previous company and they will only liquidate it if it is genuinely insolvent. They will also oversee the the process of any assets sales and report on the directors conduct. Finally, Creditors must be notified of the sale no later than two weeks following the sale.
The liquidator can look at the directors conduct 2 years prior to the liquidation and if the directors have a history of liquidation and restarts then they may be disqualified. Especially if it can be shown that they have been “serial phoenixing” to avoid paying tax.
If the business and assets of the “old co” are bought then it is possible that, if people are still employed, then their contracts will have to be moved across. This is often the case in a pre pack administation but it might apply in a phoenix in certain circumstances.
While the process is legal, you may face scrutiny from creditors and HMRC.
If you want to carry on the business even if the company is insolvent, other options exist. This can be done through a pre-pack administration, where the sale of assets is pre-arranged with the directors, or a Creditors’ Voluntary Liquidation.
Be aware that in the case of companies failing due to misconduct by directors, the Secretary of State has the power to disqualify the director for up to 15 years. TUPE regulations may also come into play, and the new company may need to take on the employment contracts of the old company.
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Written ByKeith Steven
Turnaround Director
Keith is the Turnaround Director of RMT Accountants & Business Advisors. Prior to being acquired by RMT The company as KSA Group has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
