What is a Phoenix company?

Phoenixing, or phoenixism, are terms used to describe the practice of carrying on the same business or trade successively through a series of companies where each becomes insolvent (cannot pay their debts) in turn. Each time this happens, the insolvent company’s business, but not its debts, is transferred to a new, similar ‘phoenix’ company. The insolvent company then ceases to trade and might enter into formal insolvency proceedings (liquidation, administration or administrative receivership) or be dissolved.

Companies can fail, be dissolved or face financial difficulties for a variety of reasons apart from misconduct. So, the law allows owners, directors and employees of insolvent or dissolved companies to set up new companies to carry on a similar business. This is as long as the individuals involved are not personally bankrupt or disqualified from acting in the management of a limited company.

When a company goes into administration or liquidation, the administrator or liquidator will try and get in as much money as possible to pay creditors. Sometimes the best offer will be from the former directors or owners to buy back part or all of the business, including the company’s name or trading name. This is sometimes called a ‘pre-pack’ administration. The law allows this.

However, generally, when a company enters liquidation (this is often referred to as being wound up), insolvency law restricts who can reuse the company’s registered name and trading names.

Unless any exception applies, anyone who was a director in the 12 months before the company went into liquidation is banned from taking part in the management of another business with the same name. This ban lasts for 5 years and also covers names which are so similar they suggest an association with the previous company.

Although as mentioned above, Phoenix companies are allowed by law if set up correctly, the practice can be exploited. Assets may be sold to the phoenix company at below market value, the director(s) of the phoenix company may have intentionally avoided settling the debts of the original company or it may be the intention of the director(s) to enter a continual loop of setting up a company, accruing debt, transferring assets to a new entity at below market value and escaping the debt of the original company by moving to the next.

It is also possible that a phoenix company is created by a director without correctly following the appropriate law either through ignorance or bad advice.

As a phoenix company can arise from any of the above reasons, for clarity Company Watch has decided to refer to phoenix companies in two ways:

1. Legitimate Phoenixisms – the practice of carrying on the same business or trade successively through a series of companies, as allowed by law, where each becomes insolvent (cannot pay their debts) in turn. Each time this happens, the insolvent company’s business, but not its debts, is transferred to a new, similar ‘phoenix’ company. The insolvent company then ceases to trade and might enter into formal insolvency proceedings (liquidation, administration or administrative receivership) or be dissolved.’
2. Illegitimate Phoenixisms – any phoenix practice where the applicable law has not been followed or where the director(s) have intent to defraud. For example, intentionally transferring assets at lower than market value, exploiting phoenixisms to intentionally escape from debts.