The term phoenix company refers to a company that has been set up, usually through the use of a pre-pack administration, in order to purchase the assets from a previous enterprise that was no longer viable. A phoenix company will often have the same board of directors as its predecessor and may even be permitted to use a similar trading name, provided that strict guidelines are adhered to.
A phoenix company is able to pick up right where its predecessor left off, provided it has purchased the assets at market value. It will, however, be free from the debt that forced the old company into insolvency. The money realised through selling the assets will be used to make repayments to creditors after deductions for the costs and expense of the insolvency process, and any remaining debt will be legally written off, giving the phoenix company a fresh start.
Is it legal to set up a phoenix company?
It is perfectly legal to set up a phoenix company, as long as the assets are acquired at market value following a formal insolvency process such as a pre-pack administration or liquidation. This ensures that all regulations are complied with and all creditors are dealt with appropriately.
It is not legal, however, to set up a phoenix company in order to transfer assets from an insolvent company for free or significantly less than its value. Setting up a phoenix company for this purpose may be considered a ‘fraudulent transfer’ if the company then goes on to enter an insolvent liquidation process and the transaction can be reversed by the courts. The consequences for abusing a phoenix company in this way can include directors losing the protection of limited liability and being personally liable for the company’s debt, or even be accused of criminal wrong-doing depending on the severity of the circumstances.
The advantages of a phoenix company
Where the use of a phoenix company is permitted, they have several advantages over other processes. For instance:
- A phoenix company can help preserve the jobs of employees. This will not only protect their livelihoods but also reduce redundancy pay-outs and may increase the amount of money available for distribution to creditors.
- The phoenix company will be able to continue trading free from its historic debt using the assets of its predecessor, providing they have been bought at market value. It may even be able to continue using the same premises if the landlord agrees.
- The phoenix company may be able to continue to do business with many of its old suppliers and customers.
- In certain circumstances, the phoenix company may be able to continue trading using a similar name to its predecessor. This preserves the brands, goodwill and previous marketing efforts.
Can a phoenix company re-use its predecessor’s trading name?
It is possible in some instances for a phoenix company to use a similar or near identical name to its predecessor, however, several regulations apply. Failure to adhere to these regulations can result in fines, loss of limited liability and even imprisonment, so advice should be sought from a reputable solicitor before any decisions are made.
Insolvency is a complicated process that should only be dealt with under the supervision and guidance of a licensed insolvency practitioner. Wilson Field have years of experience dealing with phoenix company’s and pre-pack administrations, so for more information, or if you think a pre-pack administration might be appropriate for your business, get in touch for free today.