RISING FROM THE ASHES

What is a Phoenix?

A phoenix is when an insolvent liquidated company is continued by its directors using a new company, which often trades using an identical or similar name to the liquidated one. The new company will have had the benefit of the old company’s assets having been transferred to it usually at no value. However the intention will be to exploit the goodwill of the formerly liquidated company.

Because each company is a separate legal entity, creditors of the old company cannot claim against the new company. Sections 216 & 217 of the Insolvency Act curb ‘phoenix trading’ by preventing directors of the new company from using the old company’s.

Can a Director be personally liable for using a prohibited name?

Section S216 allows for the possibility for a director of a failed company to ‘buy out’ the company’s name and business and to genuinely re‐establish the business. The judge has to approve this move, and if this is not done the director will not only have committed a criminal offence, he will no longer have the benefit of limited liability.

If a person has been a director or shadow director of a company within 12 months of the company going into insolvent liquidation, that person may not, without the permission of the judge of the court or in the three excepted cases (see below) be a director, or otherwise involved in the management of a company with ‘a prohibited name’ at any time during the next five years.

‘A prohibited name’ is one by which the insolvent company was known in the 12‐month period before its liquidation or a name which is so similar as to suggest an association with the insolvent company.

Section 217 imposes civil liability for a breach of section 216. A person is personally responsible for all the relevant debts of the prohibited named company. The “relevant debts” are such debts and other liabilities of the company as are incurred at a time when that person was involved in the management of the company.

Now the exceptions, enabling a similar name to be used.

  1. Where all, or substantially all, of the business of the insolvent company is being purchased by the successor company from the liquidator, and notice has been given within 28 days to all creditors of the insolvent company.
  2. Where the director has made an application to the court for permission, he may continue to act as a director of the prohibited named entity until the judge’s decision, but with a maximum period of six weeks
  3. Where the successor company has been known by its prohibited name for the whole of the 12 month period prior to the liquidation of the failed company.

In practice ‘on the ground’.

The practical problem is that whilst the company may be practically insolvent with their being an asset transfer either at no value or at an undervalue, no formal liquidation will have taken place. And if the company is not in liquidation then quite simply, the Act cannot address the mischief it was designed to protect.

Otherwise directors would be foolhardy if they ignore the provisions and effects of this law.

For more information or a free legal opinion telephone 020-7381-8111 (24 hour service) or email [email protected].