What happens when a director starts a new business after the old business has gone bust?
A phoenix company is the idea where a new business rises from the ashes of the old one. Or put it another way, the old company goes bust, creditors are not paid and then the directors start a new company with the assets of the old and the customer contacts. This can breed suspicion and resentment from creditors, and in the case of larger businesses, the public at large.
As such, there has to be a transfer of assets from the old to the new.
Is it legal?
Provided the following sets of rules are complied with.
The best possible price is obtained for the old assets and they have been marketed properly
The trading name of the new company is not the same or similar to the liquidated company. This is in accordance with section 216 of the Insolvency Act
The first point can normally be covered if a Chartered Surveyor has valued the assets prior to the liquidation and has made attempts to sell them. If this is the case then the assets of the firm can be sold to a "connected party" In many cases this will be the previous directors.
As an accountant what do you need to know if setting up this kind of company?
Perhaps the most important one to remember is that if the previous company went into liquidation owing lots of money to HMRC then they may well demand that the new company offers a deposit for any VAT and/or PAYE. This is usually at least one quarters payments.
Going back to section 216 of the insolvency act it should be remembered that there are very severe penalties for breaches of these rules. It is a criminal offence to start a new company with the same or similar name to the liquidated company without leave of the court. So take it very seriously!
My client is owed money and they have now set up a phoenix company. Should we do business with them?
It is really just a common sense approach here. Setting up the phoenix company is not illegal if done properly and there may be legitimate reasons for the failure. As ever perhaps do a credit check and if the directors have a history of doing this sort of thing then proceed with caution.
A pre pack administration is sometimes called a phoenix but that is not really the case as the old company didn't really die completely and a new one rise. The whole thing happened in one movement.
He is managing director of Company Rescue Ltd and KSA Group Ltd - a specialist firm of turnaround practitioners. Keith has been featured in Mike Southon's column in the Financial Times and his book - This is How Yoodoo on entrepreneurs.
More than 5,000 people have contacted KSA Group since Keith launched this...