Dealing with insolvent companies: Phoenix Phenomenon
A Phoenix company is born out of a usually insolvent old company. The new company generally has the same directors and a very similar name. This enables it to adopt the goodwill and business from the old company with none of the debts and liabilities. The owners do not pay into the old company for the goodwill and often start the Phoenix company with the benefit of the old company’s on-going contracts. What can a creditor do when the old company goes in to liquidation and has no money to pay its debts? Section 216 of the Insolvency Act 1986 restricts what a director can do in terms of re-using the old company’s name. For a period of 5 years from liquidation the director is prohibited from incorporating or being any way involved in setting up a new company with the same or similar name as the old company. The section imposes personal liability on the director. Contravention of section 216 is a criminal offence that could result in imprisonment. The director also faces a potential civil claim by the old company’s creditors. Section 217 confers on the creditors the right to sue the director personally for recovery of their debts. It is not possible for a creditor to assign this right to the company Liquidator. Only the creditor has the standing to sue the director under section 217. A creditor in this situation would normally sue both the old company and the director together. If the Liquidator is ordered to pay the creditor and has no assets to the pay the debts, they may recover from the director personally for a financial contribution towards the debt. If looking to take action against a Phoenix company, creditors should consider urgent legal action to restrict a director’s ability to dissipate personal assets. A creditor may need to apply for a freezing injunction as a preliminary step. If you are left in this position do not hesitate to take legal advice to maximise the potential debt recovery.