If you are a director of an insolvent company or a bankruptcy, Oliver Elliot can help you address your concerns arising from the closing down your company and deal with the question of What Is a Phoenix Company.
What Is A Phoenix Company? Phoenix companies are companies that arise from a previously insolvent company and in effect carry on the same trading business.
Why Do Phoenix Companies Get A Bad Name?
What is a phoenix compay? The reason Phoenix companies get a bad name is because the impression often left with creditors of the former company that has gone into liquidation, is that the Directors have dropped the debts and can still continue to trade with the assets of the business.
In particular, the term is typically used to convey the image of a trading business continuing as if there was no liquidation because the business might trade with a similar name, with the same phone number, same website, trading premises and assets.
However, if the Directors have set up a new company to continue to trade using the assets of the company in liquidation, they are not permitted to do so if they have not paid a fair market value for them. Payment for the assets is what enables the costs and expenses of the liquidation to be discharged and if sufficient funds are available thereafter, a distribution to creditors.
What If The Assets Of A Phoenix Company Have Not Been Paid For?
If the assets of the company in liquidation have not been paid for then it is quite likely that a Transaction At An Undervalue can have arisen.
What Is A Transaction At An Undervalue And How Is That Related To A Phoenix Company?
A Transaction At An Undervalue is when a transaction has been entered into for less than the fair market value of the asset being transferred. It is a breach of Directors’ Duties to engage in Transaction At An Undervalue when a company is insolvent and to be placed into liquidation.
Are Phoenix Companies Permitted?
Phoenix companies are not permitted if they result in creditors being defrauded and the liquidation process abused. It is permissible to start a new company having paid for the assets of the old company provided certain rules are adhered to.
A permissible way to do this is through what is known as a pre-packaged Administration.
What Is A Pre-Packaged Administration And How Is That Related To A Phoenix Company?
A pre-packaged Administration is the process of a Director of a company that is going to go into Administration, setting up a new company to buy the assets of the old company after organising the same in advance of it going into Administration.
There are strict rules to adhere to, both by the Director and the Licensed Insolvency Practitioner who would be the Administrator. It is therefore important to get professional advice at the earliest stage if this process is being considered.
Re-Use Of Company Names
It is not permissible for a Director of a company that has gone into liquidation using one company name or trading style, to then re-use the same or similar name within the five years of going into liquidation.
There are some exceptions and it is possible for a Director to re-use such a company name but the relevant rules must be strictly complied with. Therefore a Director who wishes to re-use such a company name ought to take professional advice to see if they can satisfy the procedures.
However, generally, it will be a criminal offence under Section 216 of the Insolvency Act 1986 for a Director who cannot show that they have satisfied the requirements if they continue to re-use such a prohibited name.
Personal Liability For Directors: What Is A Phoenix Company?
There is a very real risk that if a Director does re-use the prohibited company name and if the new company goes into liquidation also, that the Director will be personally liable for the debts arising from the new trading company.
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