A phoenix company is simply a new company rising from the ashes of the old one, like the mythical bird of ancient Greece. A phoenix company typically starts out after the previous insolvent company has been put into liquidation or administration and the "business" and or "its assets" are bought by a connected party, i.e. the previous directors or the shareholders of the original business. The process is entirely legal.
Phoenix companies, or the term phoenixing, do have some understandable negative connotations with trade creditors who have been owed money and then only to see the directors just starting out again free of debt from their previous insolvent company.
New money is needed to get the company going and this may have to be funded personally by the directors or shareholders if no other investment is forthcoming.
What are the rules for setting up a phoenix company?
The following sets of rules need to be complied with:
- The assets of the old company have been purchased for the best possible price, having advertised them and marketed them properly.
- Ensured the creditors' interests are not compromised by investigating the conduct of the company directors prior to the liquidation.
- The trading name of the new company is not the same or similar to the liquidated company. (This restriction on re-use of a trade name can be lifted, if the court agrees)
- There must be no hope of survival for the old company
- TUPE regulations may come into play, and the new company will need to take on the employment contracts of the old one.
- Chartered Surveyors or Auctioneers, should be involved in valuing assets - any professional valuations are to be recorded
- Assets are to be sold at fair price, allowing unsecured creditors' returns to be considered
- Creditors must be notified of the sale, no later than 2 weeks following the sale
- All actions taken by the Insolvency Practiticioner are to be fully disclosed and sent to creditors.
What are the Disadvantages of Phoenix Companies?
In many cases there are no other options if the owners of the business want to carry on earning a living. However there are some issues that need to be borne in mind.
- The most obvious one is that the new company must have a completely different name to the original one under the rule of section 216 of the Insolvency Act 1986. This may mean that some goodwill is lost with customers.
- The directors will be investigated by the liquidator and may be disqualified if wrong doing is shown.
- A new bank account will need to be set up
- A credit search of the new company will reveal that the previous directors had failures in the past which means that it might be harder to borrow money
- HMRC will demand VAT deposits for the new company, especially if they lost out in the liquidation of the previous company.
- HMRC may take the view that the company has been liquidated purely to avoid tax. If this is the case they can reclaim it. See this article that explains that they could issue a liability notice.
With so many rules to follow, of course, it isn't as straightforward as it sounds. So give us a call for practical advice and talk to us free of charge on 0800 9700539