Are phoenix companies legal? And what is the law regarding a business formed with assets of an insolvent company? Neil Dingley of Moore investigates.
What is a phoenix company?
A phoenix company describes a business that is formed when the assets of an insolvent company are purchased out of a formal insolvency process, often by the existing company directors. After the insolvent company is closed, a new business begins to operate in the same way as before using the purchased assets.
The word ‘phoenix’ is given to these companies as in Greek mythology a phoenix bird cyclically regenerates and obtains new life by rising from the ashes of its predecessor.
When such a scenario occurs, creditors and observers frequently ask if this practice is legal, and it’s easy to see why. Often creditors, such as local authorities and water authorities, are obliged to accept such business rates customers without sanction and without question.
Is a phoenix company legal?
The truth is most companies don’t fail because of director misconduct. Therefore, from a strictly legal standpoint, there is nothing in UK law preventing owners, directors and employees of an insolvent company working for a phoenix ‘successor’, as long as the individuals involved aren’t personally bankrupt or disqualified from being a director of a limited company.
However, it should be said that if a sale takes place before the insolvency procedure, it would be investigated by a subsequently appointed insolvency practitioner.
There are also some restrictions on phoenix companies in general. For example, a phoenix company cannot have the same name or similar name to its predecessor without sanction of the court. Failure to comply will place directors in a position where they will face personal liability for company debts.
Why are phoenix companies legal?
Phoenix companies often sit badly when tried in the ‘court of public opinion’. But what observers and creditors may not be aware of are the circumstances pertinent to a phoenix company. For example:
- The directors of a phoenix company may have given personal guarantees to the predecessor company and may face personal financial pressure – similar to creditors.
- The new company may have had to provide a deposit or bond to HMRC if it required VAT registration.
- If creditors wish to deal with the phoenix, it is customary if not accepted practice to increase prices to recoup losses from the first time around.
- In order to be allowed to continue to hold office, the directors may have had to pay fines and/or provide undertakings to the Secretary of State for the Department of Business Energy & Industrial Strategy.
To summarise: provided they remain within the parameters of the law, phoenix companies are legal. However, the success of a phoenix company will depend on the market place and on the customers and suppliers with whom it trades.
About the author
Neil Dingley is restructuring and insolvency partner at Moore – Stoke on Trent and has a background in information technology and accountancy