For many years the use of ‘phoenixism’ has been subject to much criticism. Here we explore what ‘phoenixism’ is, why it is generally criticised and why, for many, it may be a modern day necessity.
What is ‘Phoenixism’?
‘Phoenixism’ is the term given where all, or the majority of a businesses assets are sold to a new entity (AKA the ‘phoenix’ company). The directors or owners of the phoenix company may be the same as the insolvent business.
What is the issue?
Contrary to popular belief, a director of an insolvent business is not restricted from incorporating a new company. However, understandably, some stakeholders (particularly creditors) may begrudge the concept of directors simply buying back the assets and starting again. This commonly happens when a company enters creditors’ voluntary liquidation or perhaps a sale is agreed by way of a pre-pack administration.
Are creditors being prejudiced?
Whilst we are sympathetic to the common perception that creditors are being prejudiced by ‘phoenixism’, this is not the case where a formal insolvency process is followed.
When a business in financial distress is referred to an insolvency practitioner (IP), the IP will first explore possibilities to rescue the company; whether this be by way of some form of restructuring, obtaining finance or perhaps a company voluntary arrangement (CVA).
Where it is not possible to rescue the company, an IP will then explore the available insolvency processes with a view of maximising the prospect of a return to creditors. This could range from an administration process, where the overriding objective is to try and rescue the business on a going concern basis, to a liquidation. In both of these scenarios, an IP will instruct a suitably qualified agent to assist them in maximising the realisable value of the company’s assets.
On some occasions, the business and/or assets may be attractive to a number of parties. If this is the case, the IP will negotiate with each party to secure the best offer for the general body of creditors. The current directors, owners or even the incumbent management team will often express an interest in buying back the business and/or assets, and sometimes offer more for these assets than an external third party.
Can ‘phoenixism’ be open to abuse?
Like many things in life, ‘phoenixism’ can be open to abuse. As such, whilst it is perfectly legal, there are mechanisms in place to protect future creditors and ensure that it is not a process capable of being abused. These include:
1. Restrictions on the re-use of the same or similar trading style to the insolvent business (unless one of the limited exceptions apply). These provisions are referred to within sections 216 and 217 of the Insolvency Act 1986 and are broadly designed to ensure that the general public are not misled as to the identity of the business they are trading with. A breach of these provisions could result in personal liability for the directors;
2. A review of the conduct of each director of an insolvent company by the IP and, if necessary, the Insolvency Service to consider disqualifying one or more directors from being involved in the management, promotion or formation of a business in the future. There are many matters considered by the IP and the Insolvency Service in determining whether a director is ‘fit to act’ as a director going forward, which do include (but not limited to) a trend of ‘phoenixism’ and possible section 216 breaches.
The modern day necessity
Due to the effect that COVID-19 has had, and will continue to have on the economy, many businesses are currently struggling. Government grants or backed initiatives have kept numerous companies afloat since the March 2020 lock down. With this support set to come to an end in the coming months many business owners are concerned that they will not be able to revive the pre-lock down pipeline of work to service current overheads and pay off existing liabilities. It is these directors who may feel there is little option but to place the existing company into an insolvency process and look to set up a phoenix company.
How we can help
The management team at Ballard Business Recovery have advised hundreds of directors and owners of businesses in financial distress on the options available to them. If you are considering ‘phoenixism’ as a way to revive your business, albeit in a different entity, please contact us so that we can explore your options with you.
Phoenixism and Solvent Liquidations
When a solvent company comes to the end of its useful life, shareholders will often look to use a members' voluntary liquidation to facilitate the closure and the distribution of surplus funds. If the company was set up for a specific purposes (such as a SPV for a construction project), the shareholders will then set up a new company for their next project. Solvent liquidations are often more tax efficient for shareholders - click here to find out why.
It is important to note that whilst the phoenix operation is not an issue at all, the targeted anti-avoidance rules introduced by the Finance Bill 2016 prevent the abuse of the members voluntary liquidation process to extract funds at a lower tax rate where a phoenix operation exists. If you would like to discuss this particular matter in further detail please contact us.