When companies seem to ‘rise up again from the ashes’, they are commonly called ‘phoenix companies’, after the mythical bird. But how exactly does it work for a company to close down and then re-start again? And is it legal?
Breaking down a phoenix company
This type of company is essentially created after the assets of an insolvent company are bought by that company’s directors, during administration. These assets can then be used to start up a new business, once the former one has fully closed down. The new company will continue to operate in the same exact way as the old one.
Essentially, the business will now get a fresh start, trading as a new entity. It’s perfectly possible to start again, but what isn’t acceptable is defrauding creditors. Rules have got stricter in recent years in order to protect creditors from directors who would, for example, sell a company that owed debts, only to then buy the assets to form a new one.
So, it’s legal then?
‘Phoenixing’ isn’t technically allowed. HMRC actually use it as a derogatory term, and will demand a security bond or a personal liability notice for a director if they suspect ‘Phoenixing’ has taken place. What is allowed under UK law is for company owners and directors to set up a new business. They can even carry on trading again in much the same way as they were before.
However, they must not be personally bankrupt, and they must also have not been disqualified from acting as directors. There are also rules that restrict the usage of the same or similar name being used for the new company. The same name cannot be used for 5 years by anyone who has been involved in the formation, promotion or management of the liquidated company, with some exceptions. Breaking this rule is a criminal offence under the Insolvency Act 1986.
How can I start a new company & avoid ‘phoenixing’?
If your insolvent company is suffering with cashflow concerns, there are a number of different options for dealing with the situation, including a Creditors’ Voluntary Liquidation (CVL), or a Company Voluntary Arrangement (CVA).
However, in the majority of cases, you can use a company administration order, which includes a pre-packaged sale of the assets. This is referred to as a pre-pack administration. It’s called this because the sale of the assets will have been pre-arranged with your company’s directors.
One of the key benefits of choosing this, is that it offers you and the other directors the chance of saving your company’s business, even if it can’t save the whole company itself. Selling the business this way will ensure ongoing trade, customer relationships and jobs can be preserved – along with your company’s reputation.
For more information on Pre-Pack Administrations, contact one of our insolvency experts on [email protected] or 0161 907 4044.