What are Phoenix Companies and the Rules Around them?
A phoenix company gets its name from the mythical bird of fire that rises from the ashes, and in essence, that’s exactly what a phoenix company does.
This article will explore what Phoenix Companies are, how they work, and whether they are legal in the UK. We will also examine the rules surrounding Phoenix Companies, including regulations enforced by HM Revenue and Customs.
What is a Phoenix Company?
A phoenix company is formed when the company’s directors purchase the assets of an insolvent company out of a liquidation or administration [1]Trusted Source – .GOV- Guide to liquidation (winding up) and re-using a company name.
After closing the old company, they start a new business that continues to operate similarly using these assets.
The result is that the business can resume trading as a new corporate entity with a completely clean slate.
This route can only be chosen if it can be demonstrated that creditors’ interests are maximised. As such there are strict rules around the process [2]Trusted Source – .GOV- Phoenix companies and tax abuse.
What’s the Process of Creating a Phoenix Company?
- Insolvency: The first step in creating a Phoenix Company involves putting a company into administration or liquidation
- Consult with a Licensed Insolvency Practitioner: An insolvency practitioner must manage a phoenix process to ensure that creditors are not disadvantaged. Professional valuations must be arranged, and the pre-pack sale must be appropriately marketed.
- Purchase of Assets: The directors of the previous company may purchase the company’s assets from the IP, or another buyer may purchase the assets and sell them back to the directors.
- Creation of a New Company: The directors can create a new company, using the purchased assets to start the new business.
- Compliance with Legal Requirements: The directors must ensure that the new company complies with all legal requirements, such as registering with Companies House and obtaining necessary licenses or permits.
- Informing Creditors: It is a legal requirement for the insolvent company’s creditors to be kept apprised throughout the process.
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.
What are the Rules Surrounding Phoenix Companies?
- 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 price, and the creditor’s interests must be considered during the process.
- The new company must not have the same name as the previous company to avoid misleading the public 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.
Section 216: Restrictions on Reusing a Company Name
Section 216 of the Insolvency Act 1986 prohibits using a company name that is the same as or too similar to the name of a previous insolvent company.
The only exception to this is ‘Except with leave of the court or in such circumstances as may be prescribed…’
This is to prevent directors from creating a new company with a similar name to the previous company and using the goodwill of the previous company to gain an unfair advantage.
This is taken very seriously by the law as evidenced by the consequences: ‘If a person acts in contravention of this section, he is liable to imprisonment or a fine, or both.’
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:
- Shareholders must hold a minimum of 5% equity and voting interest before the liquidation begins
- The distributing company must be currently or in the 2 years before liquidation a ‘close company’, meaning it has five or fewer participants
- The recipient shareholders are seen to be involved in a similar business within a two-year period of shutting down the original company.
- The ‘reasonable’ evidence suggests that the liquidation was prompted by a chance to pay reduced income tax.
Want more information about setting up a phoenix company out of a pre-pack administration?
It’s a fact of life that not all legitimate businesses succeed the first time. In fact, one in three businesses closes within three years. In this case, a new company allows a business to start again from scratch and for the profitable elements of the business to survive for both the suppliers’ and the employees’ benefit. There is the question of making sure that the same mistakes are not made again going forward.
For more information about setting up a phoenix company out of a pre-pack administration or creditors’ voluntary liquidation, please contact our expert team today on 0800 074 6757 or hit the Orange button on the bottom right-hand side for live support.
Phoenix Company FAQs
Phoenix companies are not inherently illegal, assuming the letter of the law is followed. However, the use of phoenix companies to avoid paying debts or taxes is illegal, and strict regulations are in place to prevent abuse of the process.
Creditors of the original company have legal rights and can object to the use of the phoenix process if it is found to be an abuse of the system. Additionally, new legislation in some jurisdictions allows for the recovery of funds from directors who have benefited from illegal phoenix activity, and the disqualification of directors who engage in such behavior.
Directors of an insolvent company can be involved in a new Phoenix company, but they must comply with strict regulations designed to prevent the abuse of the process. The new company must also take on the liabilities of the original company and pay its creditors, and the directors must not profit from the process if the original company had unpaid debts or taxes.
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.
- Trusted Source – .GOV- Guide to liquidation (winding up) and re-using a company name
- Trusted Source – .GOV- Phoenix companies and tax abuse
