The phoenix - a mythical bird that rises from the ashes in rebirth and colour - we’re sure you’re aware of its wonderful traits, but, how exactly does a mythical bird relate to a business? And what exactly is a phoenix company?
These are the questions we’ll answer in this article. We will guide you through the ins and outs of a phoenix company, and help you to understand what a phoenix company is and what the rules are around them.
We’ll cover:
Some examples of phoenix companies
Whether phoenix companies are legal
The rules that phoenix companies must follow
The connection between insolvency and phoenix companies
The disadvantages of this type of business structure
What is a phoenix company?
A phoenix company is a business that has been deliberately liquidated to avoid paying debts, taxes, or other liabilities, only to re-emerge shortly afterward under a different name or ownership structure. The new company, often operated by the same individuals as the original business, typically continues the same or similar business activities as the previous one.
The term "phoenixing" is used to describe this process, where the old company "dies" like a phoenix burning down, only to rise again in a new form. While not all instances of company liquidation and re-establishment are illegal or unethical, phoenixing becomes problematic when it is used to get away from financial obligations, like unpaid debts to creditors, taxes, or employee entitlements.
Authorities have measures in place to stop phoenixing and hold people to account for fraudulent or irresponsible business practices. These measures may include enforcement actions, penalties, and legal action aimed at stopping the abuse of corporate structures and protecting the interests of creditors, employees, and the public.
Is a phoenix company legal?
Yes, setting up a phoenix company after an insolvency is legal in the UK as long as the rules around them are followed.
These rules include that the directors aren’t personally bankrupt, or disqualified from being the director of a limited company.
There are other restrictions around phoenix companies. For example, they cannot have the same name or a similar name to the previous insolvent business, or they will be sanctioned by the court. If directors don’t comply with this rule, they can be held personally liable for company debts.
Phoenix companies can be treated by suspicion by some people, especially creditors. This is the case because some unscrupulous directors will force their companies into insolvency, so they can phoenix and start a new very similar company without debts.
Government guidance highlights the fact that most UK businesses don’t fail because of any wrongdoing on the part of their directors. Due to this, phoenix companies are legal and ultimately give businesses and their directors the opportunity to start fresh, to take the profitable elements of the business forward and take another opportunity to thrive.
Phoenix companies are beneficial to the suppliers and employees of the company that becomes insolvent as the new structure offers continuity; suppliers keep their business relationship with the company; and employees keep their jobs.
What are the rules for phoenix businesses?
When a company enters formal insolvency proceedings including liquidation or administration, these proceedings are controlled by an insolvency practitioner. This company, individual or individuals will review the failed company’s history and its affairs, and take a close review of the director’s conduct.
If misconduct in terms of potential fraud is determined, the practitioner must confidentially report their concerns to the Insolvency Service, who will investigate. You can find more information about insolvency company investigations on Gov.uk.
If a sale is made before the insolvency procedure, the company would be investigated by the insolvency practitioner that is subsequently appointed.
Phoenix company stats
Phoenix companies can have a bad reputation, as they are often, though far from always, indications of fraudulent activity.
Data from Experian research found:
Around 600,000 UK registered businesses (14%) are phoenixes and 70,000 of these were deemed suspicious, each with a pattern of more than three negative events before insolvency
In the UK, there are 1,500 directors connected to over £100m of live debt. One director had set up 118 accounts, generating £470k of written off debts
In another example, a business director and family member created more than 30 businesses with over £140,000 of unpaid defaults and unpaid CCJs between 2012 and 2019
Is it possible to carry on a business if the company is insolvent?
Yes, a business can continue if it has become insolvent. This is known as pre-pack administration.
The sale of assets is agreed between the company and its creditors in an insolvency practice, overseen by an insolvency practitioner.
Creditors voluntary liquidation is another option - it means a new company is formed after buying some of the assets from liquidators.
How to spot phoenix company misconduct as a creditor and protect yourself?
The following are signs that something untoward might have happened:
Inaccurate valuation of assets
Unpaid utility bills or rent arrears
Directors’ have unpaid CCJs or CAIS defaults
Director misconduct
Companies like Experian are also able to refer to their data sources to find the red flags that may indicate criminal activity and companies that have regularly left a trail of debt in their wake.
What are common disadvantages for phoenix companies?
The new company may have to be started from the director’s personal funds unless investment can be found. Liabilities can be high - companies that phoenix must pay employment contracts under Transfer of Undertakings (Protection of employment) (TUPE).
HMRC may ask for direct deposits when the old company had tax or National Insurance arrears, and this will reduce their risk exposure. These costs can be difficult for the new company to bear and could delay the start of new trading.
Creditors that decide to continue business with the phoenix may decide to increase fees to make back losses from their dealings with the old company.
Phoenixing can have a bad reputation as mentioned. This is a hangover from the term being synonymous with businesses deliberately defrauding creditors.
In the past, many directors would deliberately make their business insolvent to avoid paying debts, while having the ability to buy back their assets at a reduced price. This practice was made much more difficult for directors to attempt by the Insolvency Act 1986.
However, it is still possible for directors to abuse phoenix company set ups by transferring below market rate assets from a failing company to a new company structure.
Insolvency – phoenix company advice
We know that this can seem a very complicated area of the law. You’ll want to do the best by your business, but might be confused about what you’re legally allowed to do, and what the best strategy is for your business.
Phoenix company set ups allow your business to rise from the ashes and keep serving your customers and working with your suppliers. So, if your current business is insolvent through no fault of your own and you’re not ready to give up on your dream, why not consider phoenixing?
Our experienced small business lawyers will talk you through your options and guide you on whichever path you decide is best for you.
For help and advice relating to insolvency and small business law, speak to our legal assessment team today for a free case assessment and advice.