Phoenix Company: What Does It Mean And What Are The Rules?
April 29, 2021
Running a business isn’t easy, and there are lots of reasons why they might run into difficulties.
At Hudson Weir, we work with companies facing, or already experiencing, insolvency.
This doesn’t necessarily need to mean “game over” for a business, nor its same directors. There are a variety of company debt solutions that may prove suitable – one being to form a phoenix company.
In this article, we provide an overview of what a phoenix company is and the rules that surround its formation.
What is a phoenix company?
You’ve likely heard of the mythical phoenix, a bird that would rise reborn from ashes.
The phoenix provides a somewhat poetic analogy for the rebirth of a struggling business.
In the UK, a phoenix company refers to a new organisation launched in the wake of the collapse of a company due to insolvency.
In general, they begin trading after the insolvent business and the company’s assets have been purchased. This is part of the administration or liquidation process by shareholders or company directors.
There are multiple regulations surrounding the launch of a phoenix company. Expert advice should be sought to manage the process.
Why might a phoenix company be formed?
Business insolvency can occur for many reasons.
Most UK companies hit financial difficulties through no misdemeanour on the part of their directors. We regularly see businesses dissolved or in trouble for reasons other than misconduct.
It is only fair, therefore, that the law allows for those involved in the running of a business to launch new organisations engaging in similar work. However, such persons must not be disbarred from directorship or bankrupt themselves.
By forming a phoenix company, the insolvent company’s business is transferred to the new entity, without transferral of its debts.
They can begin to trade while formal insolvency proceedings relating to the original insolvent company are launched.
Phoenix companies – legal considerations and regulations
Transparency and the highest standards of professionalism can minimise friction between creditors and directors.
It is important that firm regulations exist around the creation of phoenix companies. Without such rules, original creditors may be left awaiting payment. Meanwhile, the new company could continue as though there had been no interruption in trade.
To avoid such a scenario, it is crucial that all assets of the insolvent company are sold at the market value price with professional valuations attained. Transferring assets below market value during the formation of the new company is phoenix company fraud.
Note that a phoenix company may only be formed when the original company is no longer viable. To protect the transaction and the directors, it is recommended that the transaction is made by or overseen by an insolvency practitioner.
Working with an experienced, licensed insolvency practitioner is highly recommended, since other regulations must be adhered to.
These include:
- Investigation into director conduct in the time leading up to the company’s insolvency (see our blogs on wrongful trading and misfeasance, also covering the Company Directors Disqualification Act 1986)
- Adherence to transparency: disclosure to creditors is vital with regard to all activities carried out by the insolvency practitioner and directors
- Prior to the sale, a multi-media approach must be taken to advertising the upcoming sale
- The phoenix company must have an entirely new name, in no way linked to the previous company. The use of the same name can be a breach of UK law under the Insolvency Act 1986. There are a number of ways of applying for use of a similar name, but independent legal advice should be sought
For more information about what is considered a pre-pack sale, look at our article on the subject from earlier this year.
What potential issues might be faced?
HMRC will look closely at the formation of a phoenix company from a tax perspective. So called “anti-phoenix” rules exist to ensure companies have not been wound up and relaunched merely to avoid income tax.
Do things by the book, and engage an experienced insolvency practitioner, to avoid such issues.
It’s worth flagging that if the former business had run into tax issues or NI arrears, HMRC may petition the phoenix company to pay related deposits upfront. This can make the initial “flight” of the phoenix company a bumpier ride, in terms of cash flow.
Conclusion
In this article we have provided an overview about what a phoenix company is, and the regulations attached.
Launching a phoenix company may not be the appropriate course of action for all insolvent businesses or every failed company. However, it’s important in any company debt scenario that all options are considered.
For other useful articles, take a look at our blog. Recently we’ve covered personal liability for directors in our guide on personal liability for company debts during insolvency.
For more information about forming a phoenix company or managing your company’s debts, get in touch for a no obligation chat.
