Government Phoenixing Crackdown

The Government is looking to introduce fines and disqualifications for directors who allow their companies to go bust to avoid paying debts. One of the main reasons for the new rules is to stop ‘Phoenixing’.

What is Phoenixing?

Phoenixing is a term used to describe a firm that operates through a series of companies where each becomes insolvent. Each time this happens the company assets will be transferred to another company while the debt will remain with the company that ceased trading.

In the UK the law allows shareholders, directors and employees of insolvent companies to set up new companies to carry on a similar business, so long as the individuals involved aren’t personally bankrupt or disqualified from acting in the management of a limited company, and the trading name of the new company is not the same or similar to that of the insolvent company (although there are some exclusions to the re-use of the company name.

Some companies can fail through no fault of their own, perhaps a lost contract or a massive increase in rent, leaving a company unable to pay its debts.

However, sometimes firms are set up to fail deliberately through the actions of their management with a view to defrauding creditors, only to reappear as a new company minus the debt.

Government Phoenixing Crackdown

Following government talks in 2018 the promise of new measures to strengthen the insolvency framework and help stop Phoenixing was announced. This includes:

  • Ensuring greater accountability of directors in group companies when selling subsidiaries in distress.
  • Enhance existing recovery powers of insolvency practitioners where arrangements are in place to extract business assets at the expense of its creditors.
  • Give the insolvency service powers to investigate directors where they believe Phoenixing may have taken place.

In addition, an attempt to reduce the ‘need’ to Phoenix is being introduced. The government is proposing to give directors of failing companies a grace period where creditors cannot take action. Allowing the business to attract new investment or to restructure ensuring the payment of creditors in the future.

The government is also planning to increase legislation regarding director activity to ensure group structures are made more transparent, strengthen shareholder stewardship and also to improve training and guidance of directors.

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