This Library briefing paper looks in detail at the legality of phoenix trading and at the personal liability of directors to the creditors of an insolvent company. In addition to the Insolvency Act 1986 (as amended) and the Enterprise Act 2002, this note looks at new provisions contained in the Small Business Enterprise and Employment Act 2015, which received Royal Assent on 26 March 2015.Jump to full report >>
Constituents frequently raise with their Members of Pariament the issue of phoenix trading and pre-pack administrations.
What is phoenix trading?
This is where the assets of an insolvent business are re-acquired (often at less than their full value) by its former directors (or closely connected parties) who then set-up a new company involved in the same or similar business.This new company is referred to as a ‘phoenix company’ or a ‘newco’.
phoenix trading is often linked to pre-packaged administrations (referred to as 'pre-packs').
What is pre-pack administration?
A 'pre-pack' is an arrangement under which the sale of all or part of a company's business or assets is negotiated with a purchaser prior to the appointment of the administrator, and the sale contract executed on the appointment of the administrator or very shortly afterwards.
Pre-packs are not specifically provided for in insolvency legislation; according to the Insolvency Service, they have arisen out of practice and through judicial approval.
What are the main concerns?
Some creditors who are owed money by a failed company are often outraged to find that the directors of these companies may suffer little personal loss and are often able to start up a new business in the same field. To a certain extent this is an inevitable consequence of corporate ‘limited liability’. For the purposes of the law, a company is a separate legal entity and if it trades with limited liability its directors and shareholders do not usually retain liability for the company’s debts should it become insolvent.
Legally, there is nothing in law to prevent a director of a failed company from starting a new business 'overnight' provided that he has acted 'properly' in managing the first company both before and during its insolvency. However, if the director of an insolvent company has deliberately acted to the detriment of creditors, action may be taken against him under both insolvency and company legislation. In certain circumstances, directors may incur personal liability for their acts or omissions in managing the company.
This Library briefing paper looks in detail at the legality of phoenix trading and at the personal liability of directors to the creditors of an insolvent company. In addition to the Insolvency Act 1986 (as amended) and the Enterprise Act 2002, this note looks at new provisions contained in the Small Business Enterprise and Employment Act 2015, which received Royal Assent on 26 March 2015.