What is a Phoenix Company and the rules around this process?

Understanding a phoenix company and the legal implications

A phoenix company describes a business that has been purchased out a formal insolvency process such as administration or liquidation, often by the existing directors. The term refers to a phoenix rising from the ashes, but there are strict rules that govern the use of this process.

It is not possible for directors of an insolvent company to choose this route without clear evidence that creditor interests will be maximised. This should be the main consideration for any insolvent company as the insolvency practitioner appointed to oversee the administration or liquidation process is obliged to recoup as much money as possible for unsecured creditors.

“Phoenix companies are one of the most misunderstood areas of insolvency. Many of the directors who ask us about this option assume they can simply close their old company, buy back the assets cheaply, and start again under a new name with a clean slate. The reality is much more complex. There are strict rules about how assets are valued, how the sale is conducted, and what happens to the company name. When it’s done properly, a phoenix can be a legitimate way to rescue a viable business. When it’s done badly, however, it can result in personal liability, criminal prosecution, and disqualification.”
— Julie Palmer, Partner, BTG Begbies Traynor

What are the rules governing phoenix companies?

When considering the returns for unsecured creditors, it is clear that the underlying assets of the old company should be sold on at a fair price and not at an undervalue. This also avoids accusations that directors have simply walked away from the company’s debt.

Professional valuations should be attained, and clear records kept during the decision-making, valuation, marketing and sale of the old company. The ethics of this process have come into question in the past, and some sales have been successfully challenged in court by creditors.

A phoenix company can only come about should the original company have no hope of survival. This can only be determined by a licensed insolvency practitioner. BTG Begbies Traynor offer professional guidance on this and other routes out of insolvency, and are available for appointment as administrators.

How is the phoenix company purchased?

Assuming the purchase is by connected parties such as existing directors and/or shareholders, the buyers may need to purchase the company using their own personal funds if no other investment is available. In some cases not all of the assets are purchased, for example when the new company needs to streamline its operations.

The money received from the sale is used to repay unsecured creditors. Because employees are an asset of the company, their contracts of employment may be transferred over to the phoenix company under TUPE legislation.

If the valuation of assets means that directors cannot afford to buy them all at the same time, a deferred sale and purchase agreement may be available.

What are the limitations of a phoenix company?

While a phoenix company allows you to continue the viable parts of the business, it does not erase all liabilities from the old company. In our experience, the majority of directors who ask about phoenix companies initially believe it will allow them to start completely fresh. Understanding what does and doesn’t carry over is the most important conversation we have. Directors should be aware that:

• Personal guarantees survive. If you signed a personal guarantee on a lease, loan, or invoice finance facility for the old company, the creditor can still pursue you personally. Starting a new company does not release you from these obligations.
• Overdrawn directors’ loan accounts are still owed. If you had an overdrawn directors' loan in the old company, the liquidator has a legal duty to pursue repayment. An overdrawn directors' loan is a company asset and does not transfer to the new entity; instead it remains a personal liability.
• HMRC debts from the old company may affect the new one. HMRC monitors phoenix activity closely. If the old company had significant tax arrears, HMRC may require the new company to pay security deposits before issuing a VAT registration, and may scrutinise the new company’s tax affairs more closely from the outset. We’ve seen HMRC require upfront VAT security deposits of £10,000–£20,000 or more from phoenix companies, particularly where the old company had significant tax arrears.

“One of the first things we check with directors considering a phoenix is whether they’ve signed any personal guarantees. A surprising number have. Often this is on a commercial lease or bank facility they took out years ago. Those guarantees follow you, regardless of what happens to the company.”
- Julie Palmer, Partner, BTG Begbies Traynor

What are the rules of a pre pack sale?

There are strict regulations surrounding pre pack sales, intended to protect the interests of unsecured creditors and prevent company directors from escaping their obligations. These include:

• Valuation: professional valuations must be provided, as well as the names and qualifications of the valuers. It is recommended that the services of an auctioneer or Chartered Surveyor are used.
• Marketing: a broad spectrum of marketing methods must be used to advertise the pre pack sale. These should include online and traditional media outlets.
• Notification: creditors must be notified of the sale as soon as possible, but no later than two weeks following the sale date.
• Disclosure: full disclosure of all actions and decisions made by the insolvency practitioner is required within a statement sent to creditors, preferably at the same time as notification of the sale.
• Investigation: director conduct must be investigated prior to liquidation, and can cover a period of up to two years prior to the date of insolvency.
• New company name: this must not be the same or similar to the old company, as it could indicate an intention to mislead the public or any new creditors.

Understanding reuse of company name in a phoenix

Under Section 216 of the Insolvency Act 1986, a person who was a director of a company that has gone into insolvent liquidation is prohibited from being involved with another company trading under the same or a similar name for five years. Breaching this is a criminal offence punishable by up to two years’ imprisonment and/or a fine.

In addition, under Section 217, if you breach the name restriction you can make yourself personally liable for all the debts of the new company incurred during the period it used the prohibited name. This effectively removes the protection of limited liability.

There are three statutory exceptions that allow re-use of a prohibited name:

• The new company can apply to court within seven business days of the old company entering liquidation
• The new company can give notice to all creditors of the insolvent company using the Rule 22.4 procedure
• The new company has already been trading under that name for a full twelve months before the old company entered liquidation

Buying a phoenix company is a complex process, and involves multiple obligations on the part of the purchasers for the sale to be viewed as legitimate. Appointing an insolvency practitioner to determine whether this could be an an option for you and your company is the first step.

How BTG Begbies Traynor can help

If you’re considering buying back your business after insolvency, the process is more complex than most directors expect, but when done properly, it can be a legitimate and effective way to rescue a viable business. 

Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation. We’ll assess whether a phoenix is realistic for your situation, explain what it involves, and help you avoid the pitfalls that catch directors who try to navigate this without professional guidance.