Phoenix Companies - BondPartners LLP

A phoenix company is where the assets of one Limited Company are moved to another legal entity. Often some or all of the directors remain the same and in some cases, the new company has the same or a similar name to the failed business. The phoenix company will operate in the same sphere as its predecessor. In other words, these companies are companies which have failed, but are trying to be successful at the same business using same directors, staff, customers and assets.

It is perfectly legal to form a new company from the remnants of a failed company. A director of a failed company can become a director of a new company unless he or she:

is subject to a disqualification order or undertaking, or
is personally adjudged bankrupt, or
is subject to a bankruptcy restrictions order or undertaking.

It is possible to see many faults in allowing the set-up of Phoenix companies.

In the past, some directors have deliberately forced their companies into insolvency in order to buy back the assets at a reduced price while absolving their responsibility for the liabilities.

The Insolvency Act 1986 has made it far more difficult for directors to do this, with stricter rules over the insolvency process and who can become a liquidator. The liquidator must ensure that the best price is obtained for a business and its assets.

In a minority of cases, directors abuse the phoenix company arrangement by transferring the assets of a failing business at less than market value before insolvency, thereby reducing the funds available to creditors when the original company becomes insolvent.

The Insolvency Act 1986 gives the liquidator a number of powers to stop those who are abusing the system. These include allowing a liquidator to take recovery action where the failed company has entered into a sale at a lower than market value at a time when the company was unable to pay its debts. In addition, the Act makes it an offence for a director of a company which has gone into insolvent liquidation to be a director of a company with the same or a similar name, or concerned in its management, without leave of the court within 5 years after the winding up. A director who contravenes the Act may be made liable for the debts of the original company after he/she became director.

Under the 1986 Company Directors Disqualification Act (CDDA), the courts can disqualify directors whose companies have failed as a direct result of their misconduct, for periods up to 15 years. This will disqualify the person from being a director of a company; acting as receiver of a company's property and being concerned or taking part in the promotion, formation or management of a company. It also disqualifies them from being a member of a limited liability partnership or taking part in the promotion, formation or management of such a partnership.

An application can be made to the court to enable a disqualified director to become a director of another company under special circumstances.

It is important to note that the term "director" applies to anyone in the position of a director of a company, whether they are called a director or not. It includes those who give instructions on which the directors or a company are accustomed to act, known as De Facto or Shadow Directors.

Similarly, when a bankruptcy order has been made against an individual, he or she must get the court’s permission before becoming a member of a limited liability partnership or acting as a director of, or directly or indirectly taking part in or being concerned in the promotion, formation or management of a company for the duration of the order. For the duration of the order, the person is known as an undischarged bankrupt.

Legislation introduced in April 2004 gave the Official Receiver power to apply to the court for a bankruptcy restrictions order against any bankrupt who he believed to have been dishonest or in some other way to blame for his position. These orders can last for between 2 and 15 years and have the effect of continuing to apply the restrictions of bankruptcy after discharge.

These safeguards mean that it is relatively safe to trade with Phoenix companies. The majority of phoenix companies are perfectly legitimate businesses, but as with all new customers, suppliers should carefully vet them first and in particular follow up trade references and check the directors themselves. One should find out why the previous business failed and ensure that the directors are not serial abusers of the phoenix company arrangement. This information can be found out from Companies House or from a status report from a credit ratings agency.