What is a phoenix company?

A phoenix is a mythical animal that burns to ashes at the end of its life before rising from the ashes, renewed and ready to live again. A phoenix company is something very similar. It describes a new company that literally ‘rises from the ashes’ of a failed business. 

The failed company will enter an insolvency process such as Pre-Pack Administration or Liquidation. The business and its assets will be sold to a new company, often with the same board of directors as its predecessor. The new company can then start trading without the old company’s debts. In many cases, the new company can even have a similar trading name to the failed company, although you must adhere to the strict rules around business names.

Why is the use of phoenix companies contentious?

Phoenix companies can divide opinion, and understandably so. When a business fails and enters Pre-Pack Administration or Liquidation, its assets are sold to recover as much money as possible. That money is then used to repay third parties the business owes money to, known as its ‘creditors’. 

However, it’s usually the case that not all creditors are paid in full, and some unsecured creditors, such as suppliers, customers and contractors, may not receive any of the money they are owed. That debt is written off when the company is liquidated and those creditors will be left out of pocket. 

For a new company to ‘rise from the ashes’ of the old company, with the same directors and assets but without any of the old debts, can be very difficult for those creditors to swallow. That’s particularly the case when the new company goes on to trade successfully.

Are phoenix companies legal?

Although they may not always be popular in the court of public opinion, phoenix companies are perfectly legal as long as you adhere to the rules. A phoenix company must be the result of a formal insolvency process, the new company must buy the assets at market value and the creditors must be dealt with properly.

Phoenix companies can provide several benefits. There’s continuity of service, as the core business can continue to trade and serve its customers. The jobs of the employees of the old company may also be saved in line with the Transfer of Undertakings (Protection of Employment) or TUPE regulations. 

Overall, creditors are also better off, as the assets are sold at market value as part of a functioning business. That usually ensures a better return than if the business was broken up and the assets were sold individually in the liquidation process. 

How do you create a phoenix company?

The first step is to appoint a licensed insolvency practitioner. They will manage the process and ensure it maximises the return for the creditors. The insolvency practitioner will put the failing company into Administration or Liquidation before professionally valuing and marketing its assets. 

As a director of the old company, you can purchase some or all of the assets from the insolvency practitioner. You may decide to only buy some of the assets if you want to streamline the new company. It might also be possible to make a deferred sale and purchase agreement if you cannot afford to buy them all at once. The insolvency practitioner will use the money raised from the sale of the assets to repay the creditors before closing the failed company down. 

You can then create a new company using the assets you have purchased. As an asset of the old company, the employees’ contracts of employment can be transferred over to the new business before it starts trading.  

What are the rules around phoenix companies?

There are strict rules that govern how phoenix companies are set up and when they can be used: 

• Phoenix companies can only be used when the original company has no hope of survival and it can be proven that it provides the best return for creditors. 
• Professional valuations of the assets must be obtained and clear records kept of the valuation, sale and decision-making processes. 
• The old company’s assets must be sold at a fair price. 
• You must inform the creditors of the sale as soon as possible, and no later than two weeks following the sale date. 
• The insolvency practitioner must send a statement to the creditors explaining their decisions. 
• The insolvency practitioner must investigate the actions of the directors in the time leading up to the insolvency. 
• The new company must not have a name that’s the same or too similar to the old company, as it could mislead customers and creditors. 

Can a phoenix company reuse a trading name?

Section 216 of the Insolvency Act prevents a company from using a name that is the same or similar to the previous insolvent company. However, with the leave of the court, there are circumstances where you may be able to use a similar name and preserve the goodwill and brand recognition the old business had built up.

What are some of the downsides of phoenix companies?

As the director of a failing business, there are obvious advantages of a phoenix company if you think the underlying business model is viable. That said, there are also some potential issues to consider. 

Creditors of the old company may refuse to do business with the new company. That can be problematic when you’re trying to find suppliers and even utility providers. The history of company directors is also recorded at Companies House. Your involvement with the failed company may make it difficult to secure credit for the new business, particularly in the early days when it will not have a credit record of its own. 

You’ll also have to think about how you’ll fund the purchase of the failed company’s assets. If the old company has National Insurance or tax debts when it fails, HMRC may also demand that you pay a security deposit to cover future tax payments. These requirements can have a major financial impact on the new company.  

Can I save my insolvent business using a phoenix company?

Potentially, you could, but creating a phoenix company is a complex process that requires the supervision and guidance of a licensed insolvency practitioner. Call our experts for a free, same-day consultation to discuss your options or arrange a meeting at our network of offices throughout the UK.