A ‘phoenix company’ is formed when the assets of an insolvent company are purchased, usually by the company’s directors, during an insolvency process. Reflecting its definition in Greek mythology, the term ‘phoenixing’ in corporate terms refers to a new company ‘rising from the ashes’ of an old one. The business continues to operate in the same way as the old one, just under a different name, and as a separate commercial entity. This enables the company to continue trading under a clean slate, as its own corporate entity.
Is Phoenixing A Company Legal?
The term ‘phoenixing’ often comes with negative connotations. This is because in the past, phoenixing has been used by directors to defraud creditors. This would involve companies building up debt and selling off the company assets to a new company under the same name and the same directors. In this instance, assets would be sold at an under-value, defrauding creditors of the money owed to them, and allowing directors to carry on trading in the new company, debt free.
As a result of phoenixing being associated with fraudulent activity, strict regulations have been brought in under insolvency law in order to protect creditor interests when a phoenix company is set up.
Phoenixing can sometimes be a viable option for companies that are facing insolvency. The law allows directors of insolvent or dissolved companies to set up a new company that carries on a similar business so long as:
- There is clear evidence that creditors interests will be maximised
- The directors are not personally bankrupt or disqualified
When phoenixing a company, the following rules must also be adhered to:
- Creditors must be notified, no more than two weeks after the sale
- Under Section 216 of the Insolvency Act 1986, the new ‘phoenix company’ must have a completely different name to the old company that went into liquidation, unless one of the exceptions are met
- The assets of the old company must be sold and purchased at a fair price
- The conduct of directors must be investigated prior to liquidation to ensure the interests of creditors will not be jeopardised
HMRC have also introduced the following ‘anti-phoenix’ rules:
- Shareholders must have a minimum of 5% equity prior to the liquidation
- The company must be a limited company owned by five shareholders or less
- There is reasonable evidence to suggest that the reason for liquidation was prompted by obtaining a tax advantage
- The recipient shareholders are seen to be involved in a similar business within a two-year period of shutting down the old company
Phoenixing is a complex process with strict regulations to adhere to. If you would like to liquidate your business and start a new company afterwards, your safest option is to sell the company via a pre-pack sale. A pre-pack administration involves negotiating the sale of a business and its assets prior to the appointment of an administrator. This means that once a administrator has been appointed the official sale of the business is quick and efficient. Unlike with phoenoxing, in a pre-pack agreement, the company name can be reused in certain circumstances.
If you think a pre-pack administration might be a viable option for your company, or if you would like further information regarding phoenixing, please don’t hesitate to get in touch with the team at Ballard Business Recovery.
