What is a Phoenix Company And Are They Legal?

Running a business isn’t easy, and there are many reasons why they might run into difficulties. At times, a company might face insolvency. This doesn’t necessarily mean “game over,” and you may have heard of a “phoenix company.” It’s a company that rises reborn from the ashes, a bit like the mythical bird.

What is a Phoenix Company and Is It Legal?

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.

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!

Why Might a Phoenix Company Be Formed?

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.

Rules For Setting Up A Lawful Phoenix Company

There are many rules surrounding the setting up of a phoenix company. Expert advice should be sought to manage the process.

The following rules must be complied with:

• The assets of the old company must be sold and purchased for a fair price, having been advertised and marketed properly.
• The new company must have a completely different name from the company that entered liquidation. The use of the same name can be a breach of UK law under Section 216 of the Insolvency Act 1986.
• Creditors must be notified of the sale no later than two weeks following the sale.

What Do HMRC and Creditors Think?

While the process is legal, you may face scrutiny from creditors and HMRC.

• HMRC’s View: HMRC may demand VAT deposits for the new company if they lost out in the liquidation of the previous company. They may also take the view that the company has been liquidated purely to avoid tax. There are specific “Anti-Phoenix” rules from HMRC which apply to companies wound up simply to avoid income tax.
• Creditors’ View: Phoenix companies do have some negative connotations with trade creditors who are awaiting monies owed and then see the directors starting out again, debt-free. A credit search of the new company will reveal previous failures, which means it might be harder to borrow money.

Other Options and Disadvantages Of A Phoenix

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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