Jun 24
This is the final article from a series of 10 written by Jonathan Mortimer, a Dispute Resolution Partner at Raworths. The guide is written from the viewpoint of where things may become contentious and involve legal proceedings. It presents a snapshot of the some of the legal issues which impact upon directors. It is not a substitute for taking specific legal advice on a particular set of circumstances.
Many of us have experience of a company which operates for a year or two at most accumulating large debts on the way.
It pays preferred creditors only to maintain supply and leave the rest hanging. When the pressure from creditors becomes too much the company then goes into insolvency. Another new company with a very similar name suddenly has the same staff, the same premises and operations of the failed company. It is business as normal except that the creditors are out of pocket.
The courts and government departments have powers to investigate any wrongful conduct which can have personal consequences for the individuals involved but frequently the system is slow to react.
So how do we deal with the devil and the opportunities thrown up by phoenix companies? Here are three examples:
The starting point is that prevention is better than cure. The key is due diligence of the company you are trading with – check their corporate history, their financial standing and most importantly of all do not provide them with any generous levels of credit.
In the event of a phoenix situation developing, check the legitimacy of the steps taken by the liquidator. In theory, the liquidator is obliged to take steps to ensure that as much money as possible is obtained for unsecured creditors. But have they done so? For example, test the liquidator to ensure that the assets of the failed company have been sold for proper value to any new start-up since a number of sales have been successfully challenged in court by creditors increasing the compensation available.
Sometimes the key attraction may be the goodwill associated with the company name and you would want to adopt that name going forward. However, if your purchase of the assets involves acquiring a number of the former directors in whatever management role going forward you may be unable to use the name.
In order to crack down on the misuse of a very similar corporate name, the law generally prohibits those directors being involved in a company with the same or similar name as the liquidated company for a period of five years from the date of the liquidation. Any person who does so can be imprisoned, fined and be responsible personally for any debts incurred by the new company when using the prohibited name.
It is important to say that are some innocent phoenix companies in business. In particular, where the directors have genuinely taken steps to rescue what remains of the business before complete collapse. It is perfectly legal as long as the correct procedures are followed to form a new company from the remains of a failed business.
A guide for directors: What you should know before accepting the appointment.
Links to other articles in the full series can be found here when they are published:
Jonathan Mortimer has significant experience dealing with contentious company matters including the issues covered in this guide. Jonathan can be contacted by email at jonathan.mortimer@raworths.co.uk or telephone 01423 566 666. Raworths is based in Harrogate, North Yorkshire.
Published on 3 June 2024
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