What is a phoenix company?
A ‘phoenix company’ arises where the assets of one limited company are transferred to another legal entity. This usually happens when a business is sold as a ‘going concern’ out of a formal insolvency, such as an administration or liquidation. Often some or all of the directors remain the same; approximately 85% of ‘pre-packs’ result in sales to connected parties. The product of this is that, to the outside world, a new business appears to ‘rise from the ashes’ of an old one.
Is this legal??
Whilst this can be a source of frustration to creditors, who may feel it unfair that a director is able to effectively ‘write off’ their debts and continue their trade in another guise, it is wrong to assume that all businesses fail as a result of misconduct on the part of the directors. A large proportion of businesses fail as a result of factors that are outside of the directors’ control. It would be harmful to the culture of enterprise that we are free to enjoy if legislation prevented directors from trading with a new business in these circumstances.
What about ‘serial phoenixers’??
Creditors may rest assured that there are a number of measures in place to ensure that the process cannot be abused. For example, when taking steps to sell a company in this manner, the Insolvency Practitioner must ensure that they are able to evidence that the assets have been purchased for the best possible price. However, it is important to remember that a discount may be applied on the basis of the ‘quick sale’ resulting from the company’s circumstances. Under these circumstances, the Insolvency Practitioner must provide an explanation, to creditors, of the commercial pressure faced by the company which resulted in the need for a ‘quick sale’ at a reduced rate.
In order to satisfy creditors that the failure of the business is not the result of dishonest or unfit conduct, an onus is placed on the Insolvency Practitioner to ensure that thorough investigations into the directors’ conduct are carried out. Where the directors are found to have acted improperly, it would not be appropriate for the Insolvency Practitioner to allow the directors to purchase the business as a ‘going concern’. In such circumstances, the Insolvency Practitioner will take steps to report the directors’ conduct to the Insolvency Service. The Insolvency Service may elect to liaise with the Secretary of State, who has the power to disqualify a director where he believes it to be in the public interest to do so.
For more information as to the investigative powers held by the Insolvency Service, please click on the link below:
If you have any queries about phoenix companies, or insolvency more generally, please do not hesitate to contact the team at Dunion & Co. on 01782 828 733.