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Like A Phoenix From The Flames: Is A Phoenix Company Illegal?

Posted on Feb 03, 2015 by  | Tags: creditors, insolvency, liquidation, debtor company, phoenix, directors disqualification, restoration of a company,  | 0 Comments

By Neil Morrison, Associate, Dispute Resolution

INTRODUCTION

It is frustrating for creditors when a debtor company goes bust and there are insufficient assets for the liquidator to pay even a modest dividend to them. A common scenario for exasperated creditors is the 'phoenix' company.

This is where a debtor company transfers its assets often for little or no value to a new company set up by the debtor company's directors leaving a husk of a debtor company with no assets. If a debtor company is dissolved then a creditor cannot pursue their debt against it as the company ceases to exist.

RUBBING SALT INTO CREDITORS' WOUNDS

Furthermore the phoenix company scenario unfortunately rubs salt into the wounds of the creditors as the new company may be very similar to the old company: similar name, similar trades, same directors/shareholders, same trading address or geographic location.

The directors of the debtor company can walk away from the debts and start a new debt free company while taking advantage of any goodwill in the debtor company which reflects the rescue culture of current insolvency practice.

IS A PHOENIX COMPANY ILLEGAL?

Many creditors feel they have been treated unfairly and think that the behaviour of the directors in transferring the assets from the debtor company to the new company must be illegal. While there are regrettably directors that successively allow companies to run down to the point of  insolvency, it should be kept in mind that many directors of insolvent companies may simply have encountered trading difficulties. These directors may honestly wish to make a go of it and require the goodwill of the debtor company to do that.

So is it illegal? Well, that depends on what the directors do. If a director uses the old debtor company's name (or a similar name) and business without obtaining approval from the Court then a criminal offence has been committed (s. 216 of Insolvency Act 1986) and the director may then be found personally liable for all the debts of the phoenix company for the time when the director was involved in the management (either directly or indirectly) of the phoenix company (s.217 of the Insolvency Act 1986).

It also depends if the director or directors can bring themselves within one of the exceptions outlined below:

EXCEPTIONS

There are three exceptions to the ban on directors using the old company's name (or a similar name which indicates an association) which are set out below:

1) If all or a substantial amount of the insolvent old company has been bought or will be bought by the phoenix company from the liquidator and the creditors of the insolvent companyhave received notice within 28 days of the completion of these arrangements.

2) If a director has applied to the Court for approval to use the old company's name (or a similar name which indicates an association) then can act as a director for the phoenix company for maxiumum of 6 weeks from the date of liquidation to the date the Court makes its decision on the application.

3) If the phoenix company has been known by the old company's name or a similar name for 12 months before the liquidation of the old company.

CONCLUSION

A difficulty that arises is that in many cases the old company does not go into liquidation, it is just struck off the Register of Companies so no formal liquidation occurs i.e. no liquidator is appointed so the provisions in the Insolvency Act directed at phoenix companies (s.216 and s.217) are unable to be invoked. 

It is also clear from relatively recent legal authorities, as is often the position with any legal case, that whether the relevant sections of the Insolvency Act 1986 bite for creditors will depend on the specific facts and circumstances arising in the case.

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If you have any queries arising from this article, please contact our Dispute Resolution team on 0131 226 8200.

DISCLAIMER: While every effort has been made to ensure the accuracy of this blog post, it is not intended to provide legal advice as individual situations will differ. No recipients of content in this blog post should act or refrain from acting on the basis of the blog post without seeking the appropriate legal advice on the particular facts and circumstances at issue from a qualified solicitor in their jurisdiction. The blog post is for general information only and is not legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. No solicitor-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with a solicitor qualified to practise in your jurisdiction.  Should you be interested in seeking our assistance with a legal matter, please contact the Dispute Resolution team on 0131 226 8200.

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