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?
- 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.
For more information on Pre packs and liquidations refer to our site www.companyrescue.co.uk
More than 5,000 people have contacted KSA Group since Keith launched this unique website in 2000 and over 500 companies have now been directly assisted by the author over the last 15 years with assignments ranging from large multi national projects to small manufacturing companies, to simple advice over the phone.
For example, Keith ran a £500m sales company in an Administration plus CVA rescue in 2004 and that company (now much smaller) survives with sales over £100m or so. Keith has worked with much smaller concerns from £300k sales upwards and he is currently leading the turnaround of a £120m service company, (CVA).
Keith started his career as a retailer and experienced the savage recession of the 1990's first hand. This was before the banks had a planned approach to dealing with SME's failure. Close struggling businesses first; ask questions later was the response then. Of course this was driven by insolvency practitioners who wanted big fees.
So he learned a lot in a short time and thought "how can we help struggling businesses"?
He joined a specialist turnaround firm in London in 1994 and has helped set up two venture capital companies since, specialising in the distressed / turnaround sector. Since then he has focused on driving the delivery of free information to distressed business people and promoting the use of CVA's, innovative administrations and informal turnarounds.
Keith is a former director of the UK Turnaround Management Association and an associate of the Turnaround Finance Group.
There isn't much he hasn't seen, he is an entrepreneur and vastly experienced in turning around companies. Talk to Keith directly if you want.