Everything you Need to Know about a Phoenix Company

As a creditor, you will undoubtedly encounter many different financial situations that put your investments and cash flow at risk. It is your duty (and in your best interests) to protect yourself from potential hazards and to arm yourself with a plethora of knowledge relating to potential situations that could arise concerning the business you are crediting/supplying a service too. Understanding the various laws and legal practices surrounding business operation will allow you to stay ahead of the game and ensure that you receive what you are owed.

One particular form of business that you may have heard of is the Phoenix Company - The formation of this type of company as you will see can drastically affect your ability to regain owed debts. Due to this factor, it is hugely important to understand exactly what this type of company is, and what implications its creation can have for associated creditors.

What is a Phoenix Company?

In essence, a Phoenix Company is a business that emerges from the remains of an old one. The name derives from the mythological Phoenix bird that upon death, is said to be reborn from its own ashes.

For example, business A is experiencing monetary problems and is failing to pay its debts. Business A may then go into insolvency. The owners/directors of Business A may then form Business B that uses the same structure, assets and trading activities, and thus wipe any outstanding debt clear. In fact, in most cases, the directors of the new Business B will purchase the assets of Business A and simply continue as normal.

Some businesses use this method as a last-resort attempt to maintain their business in difficult circumstances. Others will continue to reform Phoenix companies as a means of avoiding debts and keeping a failing business alive.

Is forming a Phoenix Business Legal?

In short, Yes. There are rules and regulations in place that allow the formation of Phoenix companies providing that the criteria below has been met. If you feel that a Phoenix company has been created illegally, then it should be reported to the FCA immediately.

What rules must be complied with to create  Phoenix Company?

As stated above, there are several stipulations that must be met in order for a business to Phoenix:

1. The owners or directors cannot be personally bankrupt or disqualified from managing a business.
2. The Phoenix company’s business name is not similar to its previous iteration (unless specifically agreed with the insolvency practitioner).
3. Creditors interests should be maximised.
4. Associated assets should be purchased at market value by the new business.

How can this affect your ability to receive owed debts?

Your main worry as a creditor concerning the creation of a Phoenix Company is receiving any debts you are owed. Given that a Phoenix Company has risen from the proverbial ashes of a previous business, how do you expect to receive any payments? The new Phoenix Company is not legally obliged to pay any debts, therefore it puts previous creditors at a disadvantage. Although you will gain a portion of your debts through the sale of assets and through the legal insolvency process, there is a chance that you will never recover all the money you are owed.

To combat this, it is important to monitor the actions of both the original company and the new Phoenix Company. Ensure that you check for any illegal conduct, and be sure to contact the Financial Conduct Authority, and seek the professional advice of a financial services business such as Kingsland Business Recovery.

For more information on the matters discussed in this article, please feel free to contact one of our directors on 0800 955 3595 for a no obligation, confidential chat. Or alternatively, drop us an email at info@kingslandbr.co.uk.

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