A Phoenix company can prove a helpful way to start a business afresh after the original company entity has ceased trading. While this practice has gathered some criticism over the years for its misuse by certain directors in avoiding repaying their outstanding company debts, the foundations of the process are indeed legal, as long as the phoenix company process is followed carefully and governed by expert advice.
Below, we outline what directors need to consider when looking to close their business and start again.
What is a ‘phoenix company’?
A phoenix company is one that has closed down, usually through liquidation, which is then started again in a different form. Business failures occur for many different reasons and often through no fault of the directors. UK insolvency law is there, in part, so that business owners can close a business legally and begin a new company without the burdens of the previous business continuing.
It is legal for a director to buy the assets and goodwill of an insolvent company, provided they pay the market value and take responsible action toward the company’s creditors.
Unfortunately, directors who attempt to use the insolvency process to defraud creditors have marred this legal practice. For this reason, the Insolvency Service has worked hard to tighten up all aspects of the insolvency process so that creditors are not placed at a disadvantage and the directors of the insolvent company have greater and defined legal responsibilities.
In short, starting a business after insolvency is not illegal, provided the correct process is followed.
What are the rules regarding a phoenix company?
Directors
UK insolvency law allows company directors to set up a new business and trade in much the same way as the closed business. However, this is only as long as the individuals involved are not personally bankrupt and have not been disqualified from acting as directors.
Company name
At the heart of the old practice of ‘phoenixing’ was carrying on a business with the same name after liquidation. Because of this, specific restrictions have been brought in under the Insolvency Act. Section 216 makes it a criminal offence to use the same or a similar name as the company that has entered liquidation for a period of five years (with exceptions). These restrictions apply to anyone who has been involved in the formation or management of the liquidated company.
We have found that a director wishing to carry on the name of their business is often down to emotional attachment, rather than anything nefarious. But directors need to consider the benefits of starting a new venture without any of the reputational burdens that are attached to the closed business and its name.
Pre-packaged sale
Pre-packaged sale refers to a pre-arranged sale of company assets, usually to the company directors. It is common practice to sell the assets and goodwill of the insolvent company through a pre-packaged sale. This can often be the best deal for directors and creditors alike. This is because the pre-pack is likely to be worth more to the directors of the insolvent company than on the open market, meaning there will be more funds available to disburse to the creditors.
The pre-pack value will need to be proven that it is a reasonable and fair price and the current asset value thoroughly assessed. The valuation of the assets must be independent and provided by a Royal Institute Chartered Surveying agent.
One of the greatest advantages of pre-packaged sales is the saving of jobs, which would otherwise have been lost through the business closure.
When is a phoenix company prohibited?
If a company fails as a result of misconduct of the directors, it is the duty of the insolvency practitioner to report this to the Insolvency Service for further investigation. If the Insolvency Service finds evidence of unfit conduct on behalf of the directors, a director disqualification can be sought. The director would then be banned from forming, promoting or managing a business for a period of between 2 and 15 years.
HMRC rules
Due to the tax debt that inevitably builds through repeated phoenixing, HMRC has brought in specific guidelines to assess if a director has repeatedly used insolvency to avoid paying taxes.
HMRC outlines four conditions that need to be met in order for a penalty notice to be issued:
- in the five years prior to the notice, the director had been involved with at least two companies (the old companies), which had entered into an insolvency procedure and owed taxes to HMRC;
- the director is connected with a new company that is carrying on a trade similar to the old companies;
- at least one of the old companies still owes taxes to HMRC; and
- the amount owed is at least £10,000 or 50% of the amount owed to the creditors
If a director has received an HMRC notice, we would advise they seek professional advice from an insolvency practitioner or solicitor.
Further advice on phoenix companies
Not all legitimate businesses are able to succeed, particularly in the current conditions. If the profitable elements of a company are able to survive in the form of a new business, and the directors of the insolvent company have acted legally and responsibly to their creditors, then setting up a new company is the best result.
How we can help
We have extensive experience in advising on restructuring and insolvency, closing a business and pre-packaged sales and we will always work with you to find the best solution for your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3995 6380
and we will arrange for a call with one of our Partners.
AUTHOR
This guidance article was written by Insolvency Practitioner, Mark Boast, Partner at Opus.