All too often we receive calls from creditors grumbling and complaining about the discovery of directors of failed companies starting up in business again. Creditors not only feel a sense of unfairness about it, but they feel cheated. Especially as Section 386A of the Companies Act 1993 prohibits directors of a failed company being a director, or having involvement in the formation of a Phoenix Company with the same or similar name.
This is the default position. The legislation provides for certain exclusions, with the two most common exclusions being: (1) the issuing of a successor company notice, or (2) approval from the High Court.
An application to the High Court can be expensive, particularly if opposed, so the most economical method for directors to operate a similar business is by issuing a successor company notice. This happens when the director acquires all, or substantially all, of the business from an appointed liquidator, or receiver, or under a Deed of Company Arrangement. The notice, sent to all creditors of the failed company, makes them aware they are dealing with a new entity arising out of the failure of another entity.
There is an exception, however, and it is only available through a purchase from a liquidator (or other formally insolvency provisions), which helps protect the creditors of the failed company from the unfairness of a director using “their” assets to continue to operate when they’re left high and dry. The creditors are protected by the liquidator (or receiver)’ s obligation to obtain best price. A liquidator will usually obtain an independent valuation to ensure a fair price is obtained, and (depending on the nature of the business) attempt to sale the business to a range of potential purchasers.
These sales, if done properly, can achieve a better result for creditors than any alternative available to the liquidator, as an individual involved in the failed business has familiarity with the business, and may see more value in the business than the layperson coming off the street.
This leads to the business (or a viable chunk of it), as opposed to its corporate shell, surviving. This can be in everyone’s interest, as it can mean a smaller (if any) amount of job losses and continuation of sales for the trade creditors.
Creditors will naturally be sceptical about extending credit to a Phoenix Company, and this is understandable. When this decision is forced upon you, creditors should consider why the previous company failed, and make their own assessment as to whether the new company is creditworthy. If creditors decide to support the new company, they ought to ensure new terms of trade are signed, and the appropriate security registrations are obtained.
The lesson for directors of companies which are struggling is to be upfront and honest regarding the company position, and seek professional advice at the earliest possible opportunity. If you want to remain in business with a different corporate shell, a Phoenix Company may be open to you; however, it must be done properly in order to ensure creditors interests are protected.
What are your thoughts about Phoenix Companies? Any feedback, inquiries or comments are welcome. Please email Simon at firstname.lastname@example.org.