What is a Phoenix Company?
Much like a phoenix rising from the ashes, a phoenix company rises following the insolvent liquidation of a company when the insolvent company’s name (or a similar name) (“Old Co”) is used to form a new company which carries on the same type of business with the same directors (or shadow directors) (“New Co”).
The Old Co is recycled, usually transferring over the goodwill, assets, and business contacts, but not its debts, to the New Co. If the directors of the Old Co are found attempting to transfer assets away to undermine the position of the creditors of the Old Co, this opens the directors of Old Co up to claims which may be pursued by the liquidator of the Old Co.
The rules governing re-use of an insolvent company’s name are complex and if not followed correctly, can result in serious and harsh penalties – both civil and criminal – for the directors or anyone involved in the promotion, formation or management of the phoenix company.
This article will cover the restrictions, penalties, and exceptions when it comes to phoenix companies in a broad manner, but if you require specific advice, please contact us.
Under section 216(3) of the Insolvency Act 1986 (“IA86”), there are three restrictions that apply to any director or shadow director of an insolvent company for five years following the liquidation of the Old Co.
The restrictions ban directors or shadow directors involved in that insolvent company from:
- being a director of any other company that is known by a name that is the same or a similar name to that of the insolvent company;
- being directly or indirectly involved in the promotion, formation, or management of any such company; and/or
- being directly or indirectly involved in the carrying on of the business under any such company.
Liability for breach of section 216 of the IA86 is automatic once the conditions are met and creates civil and criminal liability. The penalties include:
- imprisonment and/or a fine,
- disqualification as a company director, and
- being made personally liable for debts incurred under section 217 of the IA86.
Effectively, reuse of a company name lifts the corporate veil, removing limited liability protections for those involved in the New Co. Creditors of the New Co can pursue those involved in its operation personally. These penalties can also apply to anyone who acts on the instructions of someone that they know to be involved in the management of the New Co.
There are three exceptions under the UK insolvency regime allowing the re-use of a prohibited name. These are as follows:
- If the directors enter a purchase agreement with the liquidator of the Old Co to acquire the whole or substantially the whole of Old Co’s business including the company name. If this happens, however, notice pursuant to rule 22.4 of the Insolvency Rules 2016 must be given in the London Gazette and to all creditors within 28 days of the arrangement being put into place.
- The individual has applied to the Court for permission within seven days of when the Old Co went into liquidation. This then allows the New Co to operate with temporary protection for up to six weeks from that date until permission is granted by the Court. This provides interim relief whilst the Court makes their decision, taking account of relevant factors such as the financial competency of the New Co.
- The prohibited name is already being used by the New Co and has been for a period of 12 months prior to the Old Co entering liquidation. In that 12-month period, the New Co must have been used or known by that name continuously and must have been trading for the duration of that time; it is not enough for the New Co merely to exist without use or trade (a dormant company).
Altogether, there are very limited exceptional circumstances where directors or shadow directors will be able to continue to use the company name of a company in liquidation. Those who breach the restrictions in IA86 Section 216(3) do so at risk of personal liability and potential prison time.
This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Farrah Khalid or Katrynna Uy or write to us using the contact form below.