PHOENIX COMPANIES

What is a phoenix company?

1. The Companies Register is littered with cases involving so called “phoenix companies” – a commercial entity which has emerged from the collapse of another through insolvency. The new company is set up to trade in the same or similar trading activities as the former, and is able to present the appearance of "business as usual" to its customers.

Current law and protection

2. Company law in the UK has been formed to enable such activity in order to protect and promote entrepreneurship, by reducing risk and improving the chances of continued trading and business development.

3. The re-use of the trading name of the original company is, however protected to some extent in law, to help ensure the interests of investors and other creditors are not damaged by a lack of transparency relating to the Director's involvement with a failed company, and continued involvement with its Phoenix. This protection is contained within section 216 of the Insolvency Act 1986.

s.216 - Prohibited Name

This section applies to a person where a liquidated company has gone into insolvent liquidation and he was a director or shadow director of the company at any time in the period of 12 months ending with the day before it went into liquidation.

Under this section, a name is a prohibited name in relation to such a person if:

• it is a name which the liquidating company was known at any time in the period of 12 months or;
• it is a name which is so similar to a name falling within the paragraph above as to suggest an association with that company.

Except with leave of the court, a person under this section shall not at any time in the period of 5 years beginning on the day on which the liquidating company went into liquidation:

• be a director of any other company that is know by a prohibited name or;
• in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any such company or;
• in any way, whether directly or indirectly be concerned or take part in the carrying on of a business carried on (otherwise by a company) under a prohibited name.

Any person who contravenes this section is liable to imprisonment, a fine, or both.

s.217

Under this section, it is worth noting that a person is personally responsible for the debts of a company if at any time:

• in contravention of section 216, he is involved in the management of the company or;

• as a person who is involved in the management of the company, he acts or is willing to act on instructions given (without leave of the court) by a person whom he knows at that time to be in contravention in relation to the company of section 216.

Where a person is personally responsible under this section for the debts of a company, he is jointly and severally liable in respect of those debts with the company and any other person who, whether under this section or otherwise is so liable.

The Company Directors Disqualification Act 1986

It is also worth checking on the position of individual directors. A person purporting to act as a director of a phoenix company may have already been disqualified from acting as a company director under the Company Directors Disqualification Act 1986. Directors can be disqualified under this legislation for a period up to fifteen years. Disqualification is on the ground of misconduct which includes:

• a conviction for an indictable offence in connection with the running of a company
• (e.g. the director has been guilty of running a company with the intention of defrauding its creditors or other persons);

• persistent breaches of companies legislation relating to matters such as failure to submit annual returns;

• fraud in connection with a winding up;

New Pre-pack legislation abandoned

New legislation designed to introduce increased regulation of pre-pack sales by liquidators and administrators, originally supposed to come into force in October 2011 and subsequently delayed until April 2012 has now been abandoned!

The legislation was designed to deal with the concept known as Pre-Pack Administration applying to the situation where a firm is about to go in to administration but it is decided to re-structure it and sell to new owners who have set up a phoenix company. The new owners are usually the existing directors. Unsecured creditors do not have to be consulted in this process. The Government proposed that creditors should be allowed a notice period in which they can make objections to the transfer of the business into new ownership; they could even make an improved offer for the assets.

The original delay was because of a continuing debate over the length of the notice to be given to creditors. However, following consultation by interested parties on measures targeted at the sales of assets in insolvent companies where these are sold to connected parties (such as the directors or their close associates), Government is now not convinced that the benefit of new legislative controls presently outweigh the overall benefit to business of adhering to the moratorium on regulations affecting micro-business which is an important plank of Government’s deregulatory agenda. As much of the concern was related to small businesses, Government does not consider that measures should be introduced just for businesses other than micro-businesses. As such, Government will not be seeking to introduce new legislative controls on pre-packs at this time. 

Are you a victim of phoenix company fraud?

• If you have a claim or an outstanding complaint against the failed company, don’t give up on it. Be persistent, you should not be put off if the phoenix company claims the failed company’s liabilities are not theirs when both companies appear to be the same.
• Take your case to the Financial Ombudsman Service if you’re not satisfied with their answers.
• Tell the Financial Services Authority (FSA) about it. It can’t help with individual disputes between you and the phoenix company but the generic problem of phoenix companies is a priority for the FSA.
• If you’re a creditor to a company undergoing insolvency it’s essential that you help the official receiver or insolvency practitioner to understand the causes of failure. They have a duty to investigate.

It is a criminal offence for a disqualified director to attempt to act as a director. This should be reported to the Insolvency Service. Companies House holds a register of disqualified directors. Furthermore an undischarged bankrupt can’t be involved in the running of a company unless he or she has sought permission of the court to do so.

There is also the option for directors to apply to the court for permission to use the name and requires a "notice to creditors of an insolvent company of the re-use of a prohibited name" to be published in the local Gazette in order to alert investors to potential risk. This declaration permits the re-use of a prohibited company name in the new company, as well as the return of the former directors to work in the new company.