I hear on a daily basis the concerns raised by creditors when a company enters some mode of insolvency only to find that within just a matter of days, the Director has set up again from the same premises, utilising the same plant, machinery, motor vehicles and stock and even the same or similar company name. The term most commonly used is phoenixing, referring to the legend of the phoenix rising from the ashes. Naturally and understandably, if you are a creditor of that company it hurts and can seem very unfair given that it appears that the new business starts to trade using the company assets while the old company liabilities are left behind.
The vast majority of companies that become insolvent do so primarily because of matters beyond the control of the Directors. The Law does not preclude Directors of insolvent companies from setting up again, after an insolvency providing that they have not been made Bankrupt or been debarred from acting as a Director.
Directors are prohibited from utilising the same or similar business name for five years following a liquidation, subject to certain exceptions which can be found in insolvency legislation. Considerable financial penalties will be imposed if a director is found to be in contravention of the law.
When faced with dealing with an insolvency it is one of the Insolvency Practitioner’s (‘IP’) principal objectives to maximise the realisations for the benefit of all creditors in both a timely and cost-effective way. To this end, the responsible IP will employ an agent that will meet all the criteria under F.R.I.C.S and carry appropriate PI cover. Throughout the process of any sale of assets, strict practices are adhered to, to ensure that the Directors are not put in a better position than any potential purchaser. These practices include:
- The agent will be instructed to provide a formal report and valuation of the Company’s assets.
- The agent will utilise a number of marketing methods available to him and will include the appropriate advertisements in the media.
- A record of all interested parties, communication and offers will be kept.
- Clear records retained showing the process behind any decision making.
- Full disclosure of the actions taken will be included in a report within days and in any proposals (Administration) and progress reports (Liquidation) circulated to the creditors.
In carrying out the above, it should be demonstrated that there has been no sale at an undervalue and it should be clear why the IP has considered that a sale of assets to a Director to be appropriate when compared to the alternative options.
The IP will always consult with his agent and be guided by them as to which offer should be accepted. While the common expectation is that the highest monetary offer would be the one to proceed with, there are other factors which must also be taken into consideration such as whether a purchaser wishes to adopt the contracts of employment, which could substantially reduce claims in the liquidation in respect of redundancy and related employee claims.
As one of the oldest and most recognised licenced insolvency practises in the country, with over 100 years of combined partner knowledge, Poppleton & Appleby are more than happy to discuss with you the issue of phoenixes, or indeed any insolvency related matter. Please get in touch with us today.