Phoenix Businesses

A company is referred to as a "phoenix" when a new business commences from the failure of a previous business. It is usually run by the same management and often has a similar name to the business that failed.

Phoenix companies have had a bad reputation for some time. Prior to the Insolvency Act of 1986, some directors deliberately ran companies into the ground, only to buy the assets back from a Liquidator or Administrative Receiver, leaving the creditors high and dry.

The Enterprise Act 2002, which came into effect on 15 September 2003, seeks to promote entrepreneurship and enterprise and it provides support to the directors/owners of failed business ventures. This new "rescue culture" provides the chance for businesses to start over again and enables the profitable elements of the failed business to survive, thereby offering some continuity for both suppliers and employees.

It is not illegal to start up a phoenix company following the formal insolvency of the original company, but there are rules to be followed to ensure that the phoenix company is properly set up and operated.

These rules are designed to deal with the possible situation of directors deliberately running a company into insolvent liquidation, leaving unpaid creditors, only to set up a new business trading under a similar name to that of the failed company, thereby misleading the creditors.

The restrictions associated with phoenix companies apply to anyone who was a director or shadow director of a company in the twelve months prior to it going into insolvent liquidation.

Restrictions on use of company name

A director or shadow director of the liquidated company should not be involved in the management or formation of the phoenix company without first serving formal notice on all known creditors of the liquidated company.

It is recommended that legal advice is taken in respect of this matter, to prevent the directors of the phoenix company being personally liable for the new companys liabilities.

Acquisition of a Financially Troubled Business

If you are considering acquiring the business and/or assets of a financially troubled company, careful consideration should be given as to the best mode to achieve this, to ensure that the transaction can not be attacked and potentially overturned by any Administrator or Liquidator subsequently appointed over the company.

It may be perceived that there is conflict of interest if the company was to sell its business and assets to a phoenix company that has been set up by the failed companys directors and/or management.

It is therefore imperative that such a transaction is seen to be conducted at arms length, by an independent person.

A transaction completed by an Insolvency Practitioner acting as an Administrator, Administrative Receiver or Liquidator is considered to be independent and is unlikely to be challenged.

A legitimate sale of the assets

Aside from the obvious tangible assets, consideration must also be given to the value of intellectual property and goodwill. Although these are not easily valued, they must be given careful consideration before any transaction takes place.

An independent professional valuation is the key to having a legitimate sale of assets from one company to another.

The assets of the company would be valued on two bases:

Market Value In-situ (Going concern)
The estimated amount for which the assets could be sold to a willing buyer in an arms length transaction after proper marketing.
Market Value Ex-situ (Forced sale)
The estimated realisation of the assets if the business was to cease trading immediately and the chattel assets were removed from site for an immediate sale by private treaty or auction.

Due diligence

Whether you are a director of the failing company or an independent party there is often not sufficient time to undertake a due diligence review prior to completing the purchase of the business and/or assets.

This risk is reflected in the purchase price we are able to negotiate on your behalf and the funders we are able to introduce you to are commercially aware of the lack of due diligence and timescales involved with completing pre-pack deals.

To Summarise...

Phoenix Businesses - Find out more from Sterling Capital Reserve have many funders willing to help move your phoenix business forward from the failure of a previous business.