Did you know that it is potentially unlawful for a director to dissolve a company and then set up a new company, carrying out substantially the same functions, where the motivation for doing this is purely to try to unfairly shed the existing company’s obligations and liabilities?
This process is known as ‘phoenixing’ and is something that has attracted a lot of press attention recently. As David Ingram, partner and head of our litigation department explains, ‘In part, this is due to the growing number of companies that appear to be engaging in this practice to avoid having to pay back Covid support received during the pandemic, or to evade mounting tax bills that are now being actively pursued by HMRC.’
Companies that are being closed down with an outstanding bounce-back loan are coming under particular scrutiny, as the Government and creditors become increasingly angry about the apparent misuse of public funds and more insistent on those responsible being punished.
The message for directors is therefore simple: If you have recently dissolved your company, or are on the verge of doing so, and have or intend to set up a business of the same or a similar type, it is vital that you take legal advice to reduce the risk of phoenixing being alleged.
Lawful versus unlawful activity
What those who engage in phoenixing usually hope to achieve is to avoid the risk of being forced into compulsory liquidation, and to therefore side-step a potential investigation into their finances and conduct which could lead to them:
- being prosecuted for fraud;
- disqualified from acting as a director for up to 15 years; and
- forced to make a personal contribution to company funds, to increase the amount of money available to out-of-pocket creditors.
However, as David adds ‘It is important to not confuse phoenixing with establishing a new lawful phoenix company i.e. one that has been set up by the directors of a now defunct company with the express permission of a liquidator or administrator. For example, this could be under a deal which sees the directors purchase the company’s business or assets for a fair price (i.e. via a pre-pack arrangement) and in circumstances where the directors themselves are not bankrupt or already disqualified from acting in a directorship capacity.’
New Covid-specific legislation
For companies that have been dissolved since the pandemic took hold, one of the major concerns for directors is the introduction of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, which is specifically designed to target Covid-induced phoenixing.
Under the provision of the Act, the Insolvency Service is now able to conduct investigations into the conduct of directors without first needing to have the company restored, and to dole out appropriate punishment where wrongdoing is shown to have occurred.
How we can help
If you are dissolving your company, or have done so recently, and intend to set up a business of a similar nature, then we can offer advice on whether grounds for accusing you of phoenixing may exist and, if so, help you to take steps to defend yourself against such an accusation.
Where your company no longer exists, and you have received a notice from the Insolvency Service of their intention to launch an investigation into the circumstances of your company’s dissolution, then we can support you to explain why the decision to close the company down was taken and to justify your actions in this respect.
Equally, where it is clear that part of your motivation in going down the dissolution route was to try to evade some of the liabilities you had accrued, then we can provide you with strategic support. This will be aimed at ensuring that any sanctions imposed are proportionate and, to the extent possible, do not preclude you from acting as a director or put you in a position where your own financial security is unacceptably damaged or compromised.
However, to be able to help as fully as possible, it is vital that you contact us as soon as you become aware that an allegation of phoenixing may be on the cards.
Contact us
To find out more, and to see how we can help to defend you against phoenixing allegations, please contact David on 020 7845 7406 or via email at davidingram@iwg.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.