A Phoenix company is a new company that emerges from the assets of a failed one. But what are the rules around this process?


What is a Phoenix Company?

A Phoenix company is a commercial entity that emerges from the assets of a failed company. Essentially, when a business goes into liquidation or administration, its assets might be bought and used to create a new company. This new entity, often under similar management, rises from the ashes of its predecessor, hence the name ‘Phoenix’ company.

The process is sometimes used to shed debts and start anew while maintaining the core aspects of the original business. However, it’s essential to navigate these actions legally and ethically, as there are stringent rules and regulations to prevent abuse of this process.

This route can only be chosen if it can be demonstrated that creditors’ interests are maximised. [1]Trusted Source – .GOV- Phoenix companies and tax abuse.

What are the Rules Surrounding Phoenix Companies?

In the United Kingdom, phoenix companies are subject to a number of rules and regulations aimed at preventing fraudulent activity and ensuring that creditors are treated fairly. These rules are designed to ensure that directors of insolvent companies do not use their positions to benefit themselves at the expense of creditors.

These rules include:

  • A Phoenix Company can be created only when the previous company cannot be saved.
  • Accurate records should be kept throughout the process
  • Director misconduct is not allowed, such as the misuse of the previous company’s assets or breaking the law.
  • The previous company’s assets must be sold at a fair market price, and the creditor’s interests must be considered during the process.
  • The phoenix company must have a completely different name and trading name from the insolvent company. This helps to distinguish the new entity from the old and prevents confusion among customers and creditors.
  • Court agreement may allow the use of the previous trade name.
  • Compliance with the Insolvency Act and obtaining the advice of a licensed insolvency practitioner are essential for proper adherence to legal and regulatory requirements.

Are Phoenix Companies Legal?

Phoenix Companies are legal in the UK, but clear rules and regulations govern the process.

The main concern is the potential abuse of the process, where directors create a new company to avoid the legal and financial obligations of the previous company.

To prevent abuse, HM Revenue and Customs (HMRC) enforces strict rules and regulations that directors must follow when creating a Phoenix Company.

How is a Phoenix Company Purchased?

When purchasing a phoenix company, the buyers, who can be any interested parties, often have to arrange funding for the acquisition. This funding may come from various sources, including personal funds, loans, or external investors.

The process involves carefully selecting which assets of the insolvent company will be purchased. This decision is based on what is necessary and viable for the new company’s operations. It’s not uncommon for some assets to be left out of the purchase to streamline the new entity and focus on its core business.

The money gained from selling these assets is used to repay the creditors of the insolvent company. An important aspect of this transaction is the transfer of employee contracts. Under specific legislation, such as the UK’s TUPE (Transfer of Undertakings (Protection of Employment)) regulations, the employment contracts may be transferred to the new company, ensuring continuity and protection for the employees.

In cases where the full purchase of assets is not immediately affordable, a deferred sale and purchase agreement might be an option. This arrangement allows for the assets to be acquired over a period, making the purchase financially more manageable.

What are the Rules of a Pre Pack Sale?

The rules of a pre pack sale aim to make the process transparent and fair, especially for creditors and employees, while enabling the swift transfer of a business to minimise disruption and potential loss of value.

Key rules and considerations for a pre-pack sale include:

  1. Valuation and Marketing: The assets must be accurately valued, and the business should be marketed appropriately to ensure the best possible price is achieved. This is vital to protect the interests of creditors and ensure the sale is fair.
  2. Transparency and Disclosure: There must be transparency in the process. The administrator is required to provide detailed explanations and justifications for why a pre-pack sale was chosen over other forms of asset disposal.
  3. Best Interests of Creditors: The sale must be in the best interests of the creditors. The administrator has a duty to ensure that the outcome of the pre-pack sale does not unduly disadvantage the creditors.
  4. Compliance with Insolvency Laws: The sale must comply with relevant insolvency laws and regulations. This includes adhering to the Insolvency Act 1986 and the Insolvency Rules 2016 in the UK.
  5. Consideration of Alternative Options: The administrator should consider alternative options and demonstrate that the pre-pack sale is the best solution for the creditors.
  6. Avoidance of Unfair Advantage: If the buyer is connected to the insolvent company (such as previous directors or shareholders), additional scrutiny is applied to ensure there’s no unfair advantage or undermining of creditors’ interests.
  7. Employee Rights: Employee rights need to be considered, especially under TUPE regulations, which protect employees in the event of a business transfer.
  8. Approval and Oversight: An insolvency practitioner must oversee the process, ensuring all steps are carried out correctly and ethically.

What is HMRC’s View of Phoenixing?

New ‘anti-phoenix’ rules from HMRC apply to liquidated companies which fulfil certain conditions suggesting they have been wound up to avoid income tax.

The five conditions required to qualify as an offender are:

  1. Shareholders must hold a minimum of 5% equity and voting interest before the liquidation begins
  2. The distributing company must be currently or in the 2 years before liquidation a ‘close company’, meaning it has five or fewer participants
  3. The recipient shareholders are seen to be involved in a similar business within a two-year period of shutting down the original company.
  4. The ‘reasonable’ evidence suggests that the liquidation was prompted by a chance to pay reduced income tax.

How is Abusive Phoenix Activity Identified?

Abusive phoenix activity can be identified by several key indicators:

  1. Rapid Transfer of Assets Below Market Value: If assets from the failed company are transferred to the new company at significantly below market value, it can suggest an intention to deprive creditors of their rightful claims.
  2. Repeated Insolvency and Debt Evasion: A pattern of businesses under the same management repeatedly becoming insolvent and leaving debts unpaid, while similar new businesses emerge, is a strong indicator of abusive phoenix activity.
  3. Similar Management or Ownership: If the directors, shareholders, or management team of the phoenix company are largely the same as those of the failed company, particularly if insolvency is a recurrent theme, this raises red flags.
  4. Non-Payment of Taxes and Other Statutory Liabilities: Systematic non-payment of taxes, employee entitlements, and other statutory liabilities by successive companies under the same control is a sign of abuse.
  5. Unfair Treatment of Creditors: If creditors of the failed company are significantly disadvantaged or systematically left unpaid while a similar business continues under a new guise, this points towards abusive phoenix behaviour.
  6. Lack of Transparency in Asset Transfer: Transactions lacking transparency, especially in asset transfer between the failed and the new company, often signal abuse. This includes inadequate documentation or valuation of assets.
  7. Continuity of Business Operations: If the business operations, location, staff, and clientele remain largely unchanged, yet the company’s debts are shed, this continuity can be indicative of phoenix activity designed to evade liabilities.
  8. Manipulation of Insolvency Laws: Exploiting insolvency laws to protect personal or business interests at the expense of creditors suggests abusive practices.

What are Some of Potential Issues for a Phoenix Company?

Phoenix companies, while offering a fresh start from the assets of a failed business, can encounter several potential issues:

  1. Reputational Concerns: Phoenix companies often face scepticism or negative perceptions from customers, suppliers, and creditors who may be wary of past failures. This scepticism can impact the new company’s ability to build trust and establish strong business relationships.
  2. Credit Challenges: Obtaining credit can be difficult for phoenix companies. Creditors and suppliers, aware of the previous company’s insolvency, may be reluctant to extend credit or may require stricter terms, impacting the company’s cash flow and operational flexibility.
  3. Legal and Regulatory Scrutiny: There’s increased scrutiny from regulatory bodies to ensure the phoenix company isn’t simply a way to avoid debts and liabilities. This scrutiny can lead to legal challenges, especially if there’s a perception of wrongful or fraudulent trading in the lead-up to the original company’s insolvency.
  4. Employee Relations and Morale: Employees transferred to the new company may have concerns about job security, changes in terms and conditions, and the stability of the new entity. This can affect morale and productivity.
  5. Limited Capital and Resources: Given that phoenix companies often start with limited resources, there may be challenges in scaling up operations, investing in new technologies, or expanding the workforce, which can hamper growth.
  6. Tax Obligations and Liabilities: The new company might inherit certain tax obligations or face scrutiny from tax authorities, especially if there are questions about the transfer of assets and liabilities from the old company.
  7. Customer Retention: Retaining customers from the failed business can be challenging, especially if there was disruption in service or delivery during the insolvency process.
  8. Management Challenges: If the management team remains largely unchanged from the failed company, there might be doubts about their ability to lead the new company successfully. This can affect investor confidence and internal dynamics.

Phoenix Company FAQs

Directors must ensure that the new company complies with all legal requirements and does not engage in any activity that disadvantages the creditors of the old company. Due diligence, transparency, and adherence to insolvency laws are critical.

Assets can be transferred, but this must be done at market value and in a manner that does not disadvantage the old company’s creditors. Failing to do so can lead to legal consequences.

The primary risks include legal scrutiny and the potential for directors to be held personally liable if laws are not followed. Additionally, the reputation of the business and its directors can be negatively affected if stakeholders perceive the Phoenix Company as a way to evade responsibilities.

UK law generally prohibits a Phoenix Company from using the same name as the company being liquidated, to avoid confusion and potential fraud. Exceptions exist but are subject to strict conditions.

Employee transfer is possible, but employment laws such as the Transfer of Undertakings (Protection of Employment) Regulations may apply. Directors should consult legal advice to ensure compliance.


The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

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  1. Trusted Source – .GOV- Phoenix companies and tax abuse