What is a Phoenix Company And Are They Legal?

A Phoenix company is one that forms after the directors of an insolvent company purchase the “business” and/or “its assets” in administration or liquidation. The business continues trading as a new entity, so it rises from the ashes a bit like the mythical bird.

Is a Phoenix Legal Under Insolvency Law?

Yes! This process is entirely legal, so long that rules are followed and behaviour is not misleading or wrongful.

Phoenix companies do have some negative connotations with trade creditors who are awaiting monies owed and then see their debtors (the directors) starting out again, debt-free!

What are the rules for setting up a phoenix company?

There are many reasons why companies fail, not always due to directors’ wrongdoing. Due to this, the UK law allows company owners and directors to carry on trading in the same way as before, so long that the individuals involved are not personally bankrupt and have not been disqualified as directors.

The following rules must be complied with:

• The assets of the old company must be sold and purchased for a fair price, having been advertised and marketed properly (Seek assistance from a chartered surveyor or auctioneer to ensure the best outcome).
• Ensure the creditors’ interests are not compromised by investigating the conduct of the company directors prior to the liquidation.
• Creditors must be notified of the sale no later than 2 weeks following the sale. The insolvency practitioner must also inform creditors of all actions taken.
• The new company must have a completely different name to that of the company which entered liquidation (though the Court can make exceptions). This is under section 216 of the Insolvency Act 1986.

What do HMRC think of Phoenix Companies?

HMRC may demand VAT deposits for the new company, especially if they lost out in the liquidation of the previous company.

HMRC may take the view that the company has been liquidated purely to avoid tax.  If this is the case, they can reclaim it. There are ‘Anti-Phoenix’ rules from HMRC which apply to companies which meet conditions to suggest that they have been wound up simply to avoid income tax;

1. Shareholders must have a minimum 5% equity and voting interest prior to the liquidation.
2. The distributing company must be either currently or in the two years prior to liquation, a ‘close company’ i.e. have five or fewer participants.
3. Their must be reasonable evidence to suggest that the liquidation was prompted by the possibility of paying reduced income tax.
4. The recipient shareholders are seen to be involved in a similar business within a two-year period of shutting down the original company.

What if I want to carry on the business even if the company is insolvent?

This is possible…it is called a pre-pack administration. The sale of assets and the good-will of the company is pre-arranged in a deal/sale with the company’s directors. This tends to be the preferred option as it provides the best outcome for creditors so long the directors pay a fair price for the assets.

Another option is a creditors voluntary liquidation. A newly formed company can be created from a new company buying some of the assets and goodwill of the company from the liquidators (at a fair price determined by a valuer!)

In the case of companies failing due to misconduct by directors, the Secretary of State has the power to disqualify the director for acting in the formation, promotion, and management of a limited company for up to 15 years.

Disadvantages of Phoenix Companies

• A credit search of the new company will reveal that the previous directors had failures in the past, which means that it might be harder to borrow money.
• TUPE regulations may come into play, and the new company will need to take on the employment contracts of the old company.

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