Closing a business can be a tricky decision, but the good news is that most of the time, you are able to open another business in the future. In this blog, we’re looking into phoenix companies and the legal boundaries when starting a new business after liquidation.
What is a phoenix company?
A phoenix company is a new business that emerges after the insolvency of a previous one, often run by the same directors and trading in a similar way. This can involve purchasing the old company’s assets through a formal insolvency process such as liquidation or administration. Read our blog on liquidation vs administration.
Most of the time, a phoenix company is purchased by the existing directors of the original company. A phoenix company setup is not available to everyone, as it is subject to strict regulations.
When a company becomes insolvent, company directors must ensure that any actions taken are in the best interest of their creditors. This means that seeking insolvency advice early is often viewed positively. In contrast, directors who bury their heads in the sand and do not take action will not be perceived as maximising creditor interest.
Directors must adhere to their legal duties in insolvency; otherwise, they risk facing further scrutiny when it comes to company closure.
When a company becomes insolvent, a licensed insolvency practitioner must be appointed to manage the company’s affairs. They will assess your situation and determine the most appropriate route for your business. They may decide that you can use the phoenix structure, but only if there is clear evidence that it maximises creditor interest.
The process of purchasing a phoenix company may also be referred to as a pre-pack sale.
When can a phoenix company structure be used?
A phoenix structure can only be used when the original company is no longer viable and cannot survive.
What happens to assets in this process?
Every company has assets, whether it’s stock, machinery, cash or something else. Assets must be correctly handled if you use a pre-pack liquidation.
All company assets must be sold at market value. They should each be independently valued to ensure the process is fair.
Many directors overlook this rule and then end up paying the consequences. Selling assets to the phoenix company at an undervalued price is an offence, and legal action will be taken against the business.
All documentation relating to the sale of company assets should be retained during the sale process, and may be required as evidence that you have handled the process correctly and legally.
What rules are there for phoenix companies?
Phoenix companies must adhere to strict guidelines during the process. These relate to assets, advertising the original company and more.
Assets
As we mentioned previously in the blog, all assets must be sold at the correct market value; otherwise, you risk legal action. Always choose an independent company to value items. Read our blog on digital asset treatment.
Advertising
Any sale of the insolvent company’s assets must be properly valued and marketed to demonstrate fairness to creditors. Insolvency practitioners follow rules set out in Statement of Insolvency Practice (SIP 16), which require transparency around how the sale was conducted.
Creditor awareness
Creditors must be provided with detailed disclosure about any pre-pack sale, including how assets were valued and marketed. This is a formal requirement under insolvency regulations rather than an informal early notification.
At this stage, the insolvency practitioner may also complete a disclosure statement to send to the company’s creditors.
Director’s investigation
In many cases, directors are subject to an investigation. This enables insolvency practitioners to accurately assess your actions as a company director and identify any potential wrongdoing. The director’s conduct report is sent to the Insolvency Service and directors have the opportunity to explain any queries.
The investigation typically covers directors’ conduct in the period leading up to insolvency, often going back up to three years, to identify any potential misconduct.
Can I use the same company name?
Under section 216 of the Insolvency Act 1986, directors of a liquidated company are normally prohibited from using the same or a similar name for a new business. However, there are three statutory exceptions, for example, if the court grants permission, or if the name is purchased from the liquidator and the proper notices are given to creditors.
Connected parties may only use the same or a similar name if they comply with the specific exceptions and notice requirements set out under section 216. This is to ensure that creditors remain protected and that the public is not misled.
The registered name and trading name must not be the same as those of the old company. Additionally, directors are not allowed to use acronyms of the previous business name. Directors that choose not to follow these regulations will likely face personal liability and other consequences.
Legal boundaries when starting a new business after liquidation
Company directors must ensure that all of the regulations are followed when starting a phoenix company. Additionally, directors should be aware of some potential issues, which we have outlined below.
Money shortages
Company directors must be able to afford the phoenix company and its assets. Occasionally, due to time constraints, this may need to be purchased through personal funds. The directors should also be aware of any initial costs, such as recruitment.
HMRC arrears
If the original limited company was closed with HMRC arrears, then HMRC may require additional security from you. This may be in the form of asking for payments up front to reduce their own risk. Additionally, unpaid taxes from the old company do not disappear and may affect directors personally if they are not handled correctly.
We hope this blog has been helpful regarding phoenix companies and legal boundaries when starting a new business after liquidation. It’s really important to be aware of these boundaries before you make the decision to use a pre-pack liquidation.
At 1st Business Rescue, we have the skills and knowledge to support you with a pre-pack sale. Contact us for a no-obligation, confidential chat about your business and its future.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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