Phoenix company

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A phoenix company is a commercial entity which has emerged from the collapse of another through insolvency. The new company is set up to trade in the same or similar trading activities as the former, and is able to present the appearance of "business as usual" to its customers.

Phoenix companies in the UK[edit]

Company law in the UK has been formed to enable such activity in order to protect and promote entrepreneurship, by reducing risk and improving the chances of continued trading and business development. The law allows the directors of a failed company to be reinstated in the same, or similar posts in the phoenix company.

Often the directors of the original company may alter the company's trading name only very slightly with the name of their new company in order to convince past customers they are exactly the same entity, or even under certain circumstances, may be able to keep their original trading name. The latter is not as commonplace, however, as the re-use of the trading name of the original company is protected to some extent in law, this is in order to help ensure the interests of investors and other creditors are not damaged by a lack of transparency relating to the director's involvement with a failed company, and continued involvement with its phoenix. This protection takes the form of rule 4.228 of the insolvency rules 1986 (United Kingdom), and requires a "notice to creditors of an insolvent company of the re-use of a prohibited name" to be published in the local Gazette in order to alert investors to potential risk. This declaration permits the re-use of a prohibited company name in the new company, as well as the return of the former directors to work in the new company.

The website of the UK Attorney General says: "It is perfectly legal to form a new company from the remains of a failed company. Any director of a failed company can become a director of a new company unless he or she is:

  • subject to a disqualification order or undertaking;
  • personally adjudged bankrupt;
  • subject to a bankruptcy restrictions order or undertaking."

Criticism[edit]

There has been criticism in both the media[1] and in Parliamentary quarters, not least from the select committee for "Business, Enterprise and Regulatory Reform". The criticisms raised include the adverse effect on small to medium sized suppliers to a failed company, whose position as creditors leaves them having to write off bad debt from the former company, with the phoenix company having shed all liability to cover the debt.[2] Moreover, the select committee have also raised concerns that the law may "adversely affect competitors, who will continue to carry costs which the phoenix company has shed" [3]

Sources[edit]

References[edit]

  1. ^ Telegraph article
  2. ^ http://www.fpb.org/news/2269
  3. ^ Business, Enterprise and Regulatory Reform: Confidence in the Insolvency Regime

External links[edit]