A phoenix company is the term given to a company that starts again after it had previously closed down via an insolvency process such as administration or liquidation. In this way, a phoenix company ‘rises from the ashes’ of its former incarnation, hence the name, with the directors buying the failed firm’s underlying assets for the new phoenix company.
The phoenix process usually happens with the same directors and shareholders that were part of the failed version of the firm, and if they follow the strict guidelines they will usually be able to continue trading under the same company name.
This is only possible when the reason for the insolvency has been removed from the equation, and the new phoenix company is able to demonstrate that creditor interests will be maximised.
Are phoenix companies legal?
The phoenix company process is completely legal as long as the rules are followed and there are no misleading or deceitful actions undertaken by anyone involved in the process.
The term has a shady past due to the amount of fraud that has been committed under the guise of phoenix companies. The technically separate term ‘phoenixing’ still refers to the illegal process of avoiding the paying of debts by selling the assets of the company to a new company by the same name for far less than they were worth. This means the creditors are only owed debts by the original failed company and not the new one. Phoenixing is deliberately done to defraud creditors and is considered a very serious crime under UK law, resulting in severe penalties for those found guilty.
The penalties for phoenix trading company fraud are:
A common penalty for phoenix company fraud is the directors being held personally liable for some or all of the company’s debts. This will depend on each individual’s financial circumstances and can often lead to personal bankruptcy.
According to the Company Directors Disqualification Act 1986, a court can disqualify an individual from the role of director for up to 15 years. This not only includes UK companies, but also any foreign companies that have identifiable links with the UK. It also means that the disqualified individual cannot start a new company.
The harshest penalty for phoenix company fraud is a prison sentence. As company fraud is considered a serious criminal matter, a prison sentence is very possible for any directors found guilty of phoenix fraud. Often, the prison sentence will be handed down along with the other penalties such as personal liability for the company’s debts and director disqualification.
Phoenix company rules
The strict legal guidelines governing how a phoenix company operates were first put in place via the Insolvency Act 1986 to prevent phoenix company fraud.
For example, UK law now states that the underlying assets of a failed firm must be subsequently sold at a fair price and not undervalued. This prevents a company going into insolvency simply to avoid paying their debts and then simply buying back their assets at a fraudulently low price.
The law also requires professional valuations of the underlying assets, with clear records kept during the entire process. This means keeping a record of all decisions made leading up to and including the professional asset valuation, as well as any marketing and subsequent sale of the failed firm. This can still be a somewhat grey area in the process, with there being plenty of examples where creditors have successfully challenged the records and valuations of a phoenix company in court.
UK law also dictates that only a licensed insolvency practitioner can make the final decision as to whether a company has any hope of survival before going into insolvency.
We can help
If you’re interested in finding out more about how a phoenix trading company works, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.