What is a Phoenix Company and the rules around this process?

Understanding a phoenix company and the legal implications

A phoenix company describes a business that has been purchased out a formal insolvency process such as administration or liquidation, often by the existing directors. The term refers to a phoenix rising from the ashes, but there are strict rules that govern the use of this process.

It is not possible for directors of an insolvent company to choose this route without clear evidence that creditor interests will be maximised. This should be the main consideration for any insolvent company - the insolvency practitioner appointed to oversee the administration or liquidation process is obliged to recoup as much money as possible for unsecured creditors.

What are the rules governing phoenix companies?

When considering the returns for unsecured creditors, it is clear that the underlying assets of the old company should be sold on at a fair price and not at an undervalue. This also avoids accusations that directors have simply walked away from the company’s debt.

Professional valuations should be attained, and clear records kept during the decision-making, valuation, marketing and sale of the old company. The ethics of this process have come into question in the past, and some sales have been successfully challenged in court by creditors.

A phoenix company can only come about should the original company have no hope of survival. This can only be determined by a licensed insolvency practitioner. Begbies Traynor offer professional guidance on this and other routes out of insolvency, and are available for appointment as administrators.

How is the phoenix company purchased?

Assuming the purchase is by connected parties such as existing directors and/or shareholders, the buyers may need to purchase the company using their own personal funds if no other investment is available. In some cases not all of the assets are purchased – for example when the new company needs to streamline its operations.

The money received from the sale is used to repay unsecured creditors. Because employees are an asset of the company, their contracts of employment may be transferred over to the phoenix company under TUPE legislation.

If the valuation of assets means that directors cannot afford to buy them all at the same time, a deferred sale and purchase agreement may be available.

What are the rules of a pre pack sale?

There are strict regulations surrounding pre pack sales, intended to protect the interests of unsecured creditors and prevent company directors from escaping their obligations. These include:

• Valuation: professional valuations must be provided, as well as the names and qualifications of the valuers. It is recommended that the services of an auctioneer or Chartered Surveyor are used.
• Marketing: a broad spectrum of marketing methods must be used to advertise the pre pack sale. These should include online and traditional media outlets.
• Notification: creditors must be notified of the sale as soon as possible, but no later than two weeks following the sale date.
• Disclosure: full disclosure of all actions and decisions made by the insolvency practitioner is required within a statement sent to creditors, preferably at the same time as notification of the sale.
• Investigation: director conduct must be investigated prior to liquidation, and can cover a period of up to two years prior to the date of insolvency.
• New company name: this must not be the same or similar to the old company, as it could indicate an intention to mislead the public or any new creditors.

What are some of the potential issues for a phoenix company?

The ‘newco’ may need to be started using the purchasers’ personal funds if no external investment is available. Liabilities can be significant from the start, including employment contracts transferred via Transfer of Undertakings (Protection of Employment), or TUPE, regulations.

If the old company had tax or National Insurance arrears, it is likely that HMRC will demand upfront deposits from the phoenix company to reduce their exposure to risk. These extra demands can be difficult to meet for a new company, and may delay the start of trade. They may even negatively influence the decision to buy.

If the company goes into liquidation, the trading name of the new company must not be the same (or similar to) that of the insolvent company, subject to certain conditions. The improper use of an insolvent company's name represents a breach of the Insolvency Act 1986, and director's could face imprisonment or personal liability for company debts should they be found guilty of this. 

Professional and legal advice

Buying a phoenix company is a complex process, and involves multiple obligations on the part of the purchasers for the sale to be viewed as legitimate. Appointing an insolvency practitioner to determine whether this could be an an option for you and your company is the first step.

Begbies Traynor is the market leader in corporate recovery, and operates from offices nationwide. If you need guidance on the rules around the purchase of a phoenix company, call one of our experts to arrange a free same day consultation.