Skip to main content

Top Service News

Phoenix operations and the legalities of rising again

Published on

A phoenix operation is when a company is liquidated and the directors simply buy its assets cheaply, set up a new company, and continue to trade with the same or a similar name. Hiding previous failures from the public, it lets them leave creditors with nothing. As phoenix operations rise from the flames, it’s often their creditors that get burnt. 

Is this legal?

Phoenix companies can be legal, but there are strict regulations to comply with, specifically, Section 216 of the Insolvency Act 1986.  If this is not adhered to, those involved in the management of the phoenix company may be subject to criminal and/or civil sanctions and liabilities.

What does the law say?

When a company is placed into insolvent liquidation, Section 216 prohibits its directors from ‘involvement’ in another company with the same or similar name for five years, from the day insolvent liquidation begins. This may include existing companies/trading entities, including those that have been recently incorporated and/or commenced.  The law is designed to prevent directors hiding their old company’s failure from the public. Although they can legitimately buy old company assets, they must make it clear the new business is separate from the old one.

What is involvement and whats a prohibited name? 

A person is considered to be involved in a phoenix company if they are: a director of a company known by a prohibited name; in any way contributing to the formation, promotion, or management of such a company, or in the carrying on of a business with a prohibited name. 

A prohibited name is one the insolvent company was known by at any time in the 12 months before it was placed into insolvent liquidation, or one so similar it suggests an association. This also applies to a company’s trading names and/or abbreviations associated with it. 

There are three statutory exceptions when an individual will not be deemed to have breached Section 216, which are:

  • When (before a breach has occurred) directors who have been involved in the insolvent company give notice to its creditors that they are, or are to be, involved in a company that is acquiring the whole or substantially the whole of the insolvent company’s business from the liquidator (or administrator).
  • When the directors make a successful application to court for permission to be involved in an entity using the prohibited name; or
  • when the company with the prohibited name has been operating (and not dormant) for at least 12 months prior to the insolvent company going into liquidation.

Before any of these exceptions are relied on, it’s strongly advised that those involved ensure they receive legal advice. 

If a person acts in breach of Section 216, they may be subject to criminal and/or civil sanctions.

  • Under criminal law, the individual is liable to imprisonment or a fine, or both if convicted.
  • Under civil law the individual could be prosecuted for disqualification as a company director.
  • Under civil law the individual is automatically jointly and severally liable with the new company and anyone else acting in breach of Section 216, for its ‘relevant debts’, even if it is a limited company or partnership. What constitutes ‘relevant debts’ will be fact dependant, but they will be those debts and liabilities incurred by the new company, while it’s known by the prohibited name.

Accordingly, a creditor of a new company using a prohibited name can bring a civil action directly against those individuals involved in its management.  They don’t need to pursue the company itself, although, if it is not in an insolvency process, it may be worth bringing an action against multiple defendants.

Phoenix companies can offer a solution for directors and creditors of failing companies. However, they’re often administered incorrectly, leaving creditors aggrieved, and individuals unaware of the personal liability they may be exposed to. If you are a creditor of what you believe is a phoenix company, particularly one that has subsequently been placed into an insolvency process, you may wish to seek advice on the options available to you and the potential parties that you can pursue for the recovery your debt.

If you require advice in relation to Section 216 of the Insolvency Act 1986, as a creditor or director of a phoenix company, please contact Alison Beard, Head of Insolvency, Silverback Law, on 0844 967 2700 or  

“At Top Service Ltd as well as monitoring companies, members have the ability to monitor individual company directors.  Our director monitoring service will inform you if a director is appointed at another company or if they resign any of their directorships.

Keeping track of the individuals behind a company is often as important as monitoring the company itself.  As well as providing you with an up-to-date picture of a person’s business interests it may also alert you to potential ‘phoenix companies’. A ‘phoenix company’ is one which rises from the ashes of an insolvent company, and it usually :

  • Has a similar name to the failed company.
  • Carried out the same trade as the failed company.
  • Trades from the same address as the failed company.
  • Has the same directors as the failed company.

A phoenix company will typically be set up before the original company goes under. This is a common occurrence in the construction sector and is not illegal unless it can be proven that the directors deliberately defrauded creditors.” Emma Miller, Company Director Top Service Ltd 

What makes Top Service Ltd different? 

As the only credit reference and debt recovery agency specific to the construction industry, we make it our mission to ensure our members receive the most up to date, credit information and company trading experiences which can make a real difference between company profit and painful write-offs. 

Are you struggling to recover the money you are owed?

Top Service members have access to an exclusive combination of no collection, no fee recovery services.

Contact our helpdesk team today on 01527 518800 to discuss how Top Service can support and help you protect your business.