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.
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 company’s liabilities.
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