What is a Phoenix Company and how does it work?
For a Phoenix Company to rise, the previous company must first have gone into liquidation or administration. These two stages are very different, but for those that require more information, read our blog on differences between liquidation and administration.
The debts of the former insolvent company are not transferred to the Phoenix Company, but the assets are. As mentioned above, the directors or shareholder usually purchase the ‘new’ business. However, if there is no investment available to do so, they may have to use personal funds. This process is entirely legal, as long as there is no evidence of misconduct. Pheonix Company rules also deem you must keep in mind creditors interests.
What does the UK Phoenix Company Law state
Phoenix Company Law UK states that owners of the company which has gone into insolvency, may set up new and similar companies – it is entirely legal. However, in creating a new Phoenix Company for their trading, the director must be allowed to manage and oversee the business, emerging from the now insolvent company. This is where an insolvency practitioner comes into the equation. Insolvency practitioners act in accordance with the regulations set out by the Insolvency Law, and will look into the previous company’s activities and investigate misconduct, You can find out even more about this process in our What is Insolvency Law post. Phoenix Company UK rules in regards to ‘phoenixing’ (another term for Phoenix Company) are as follows:
- A Phoenix Company is permitted if the previous company cannot be saved. There must be no hope for the former company, to permit the creation of a ‘new’ business to trade in the same way.
- A licensed insolvency practitioner has stated that there is no example of director misconduct.
- Examples of director misconduct include the misuse of the previous company’s assets, breaking the law and damaging the prospects of customers and creditors.
- The previous company’s assets that are sold on must not have been diminished. The advice of a Chartered Surveyor or Auctioneer is required to ensure they are not undervalued, and you are not simply walking away. Again, the creditor must be kept in mind with the sale of business – you must recoup as much as you can for them.
- The name of the ‘new’, or Phoenix Company, is not the same as the previous business. The use of the same name can be a breach of the Insolvency Act 1986, as you are misleading the public and your creditors. However, it is possible that a court agreement will allow you to use your previous trade name. More information can be found here.
Setting up a Phoenix Company
The setting up of a Phoenix Company is a process not to be taken lightly. It’s extremely complicated and complex, and an insolvency practitioner is required to assess the procedure. TUPE must also be considered in the process of transferring your insolvent company to a Phoenix Company. TUPE stands for the Transfer of Undertakings (Protection of Employment) and is there to protect and safeguard employees rights if the business they happen to work for, changes or is sold on. Your employees are considered as assets to the previous company and, under the TUPE transfer legislation, the original contract may still stand and be transferred over to the Phoenix Company.
If you feel you may need more information on the setting up of a Phoenix Company, or the stages before this happens, you can contact one of our Business Rescue Experts for free, friendly advice.