What Is A Phoenix Company?
When companies become insolvent, it can very often mean the end of the business. But sometimes, new companies emerge using the assets of the failed ones to continue trading, known as phoenix companies. But exactly what is a phoenix company, and how do they work?
What Is A Phoenix Company?
As the name suggests, a phoenix company is one that emerges from the collapse of another. Typically, this will involve directors purchasing the underlying assets from the previous company in order to begin another. It’s a procedure that allows directors to retain employees and continue offering the same products and services as a new entity while shedding its previous debts and liabilities.
The Rules & Regulations
The process of ‘phoenixing’ a company has a strict set of rules and is very closely watched over by HMRC. Historically, phoenix companies have caused a lot of financial issues for creditors to the previous company and have been used by directors to avoid their responsibilities.
To prevent this from happening in the present day, clear evidence has to be submitted that transparently shows that creditors will benefit from the creation of a phoenix company and that the company has no hope of survival on its current course. This will be determined by a licensed insolvency practitioner. It must also be proved that the directors are not personally bankrupt or disqualified.
Phoenix Company Fraud
Phoenix company fraud happens when directors purchase the underlying assets of the old company at a lower price than their market value. This leaves creditors with very little return and the new company gets all debts from the old one written off, effectively letting the directors walk away from all company debt without consequence.
Avoiding paying debts to creditors in this way is illegal and comes with very serious consequences. Under UK law, you could be charged with any of the following if you are found guilty of phoenix company fraud:
- Director Disqualification – Directors involved in fraud could be disqualified from their role entirely by court order for up to 15 years. During this time, setting up or running a company is not allowed at all.
- Personal Responsibility For The Debt – They may also be held personally liable for the debts of the old company, which could lead to the threat of personal bankruptcy for directors.
- Prison Sentence – As company fraud is a very serious criminal matter, it most often comes with a prison sentence if directors are found guilty.
What Issues Might Directors Expect To Face?
HMRC keeps a very close eye on these companies to ensure that directors aren’t trying to skip out on income tax by closing and reopening the company. It’s possible that they will ask the new company to pay deposits upfront if the previous company had tax-related issues.
With this in mind, it is important to make sure you’re doing things properly and exploring all of your options. In many circumstances, those wishing to liquidate their business and set up a new company afterwards may find that selling the company via a pre-pack administration is more suitable.
Get Professional Advice
Hopefully, you now have a better understanding of the question ‘what is a Phoenix company?’. While this process can yield great results as a legitimate fresh start, there is a lot that needs to be done to ensure that the process isn’t being exploited.
If you need expert advice on your next steps following liquidation – whether that is further advice regarding the process of forming a phoenix company or setting up a new company via other means – then get in contact with us today.
