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1. Phoenix companies
Phoenixing, or phoenixism, are terms used to describe the practice of carrying on the same business or trade successively through a series of companies where each becomes insolvent (can’t pay their debts) in turn. Each time this happens, the insolvent company’s business, but not its debts, is transferred to a new, similar ‘phoenix’ company. The insolvent company then ceases to trade and might enter into formal insolvency proceedings (liquidation, administration or administrative receivership) or be dissolved.
2. The law in relation to phoenixing
The majority of UK companies that fail don’t do so because of any wrongdoing on the part of the directors, and companies can be dissolved or face financial difficulties for a variety of reasons apart from misconduct.
Therefore, UK law allows owners, directors and employees of insolvent companies to set up new companies to carry on a similar business as long as the individuals involved aren’t personally bankrupt or disqualified from acting in the management of a limited company.
However, when a company enters liquidation (this is often referred to as being wound up), insolvency law restricts who can reuse the company’s registered name and trading names.
In general, anyone who was a director in the 12 months before the company went into liquidation is banned from taking part in the management of another business with the same name. This prohibition lasts for 5 years and also covers names which are so similar they suggest an association with the previous company. More information on the restrictions on re-using a company name after insolvent liquidation and details of the exceptions that allow it.
3. The Insolvency Service’s role
Some companies do fail because of director misconduct. It’s the Insolvency Service’s role to investigate suspected cases of misconduct and take action against those who have acted against the public interest.
When a company enters into formal insolvency proceedings, the proceedings are managed by an insolvency professional. This is either an Insolvency Practitioner (IP) or a government official called an Official Receiver (OR). The IP or OR will review the company’s affairs and consider the conduct of the directors. If they suspect possible misconduct, they are required by law to confidentially report their concerns to the Insolvency Service for investigation.
The Insolvency Service also has the discretionary powers to make enquiries into the affairs of companies that aren’t in formal insolvency proceedings if they have reason to suspect that serious misconduct is taking place.
If the Insolvency Service finds evidence of unfit conduct, the Secretary of State has the power to seek a director’s disqualification where it’s in the public interest and there is sufficient evidence to satisfy the court.
4. What the Insolvency Service can’t investigate
The Insolvency Service can’t use its discretionary powers to investigate where a company has been dissolved. This is because according to the law, dissolved companies no longer exist.
The Insolvency Service also can’t use its powers to investigate or resolve individual commercial disputes between companies and their employees, customers, creditors or shareholders. For example, where the complaint is about:
- not paying an individual supplier
- not paying an employee’s wages
- not providing a customer with goods or services that they have paid a deposit for
- supplying a customer with faulty goods
- decisions made by directors that a shareholder disagrees with
These examples are not in themselves evidence of unfit conduct and are generally considered to be consumer/ commercial issues unless they are part of a broader pattern of unfit behaviour.
The primary purpose of the Insolvency Service’s investigative powers is to protect the general public and the business community. Therefore, individual disputes like those noted above must be settled without the agency’s involvement. Where necessary, independent legal advice should be sought.
5. Director misconduct
There is no all inclusive list of conduct that can lead to a director’s disqualification. Instead, each potential disqualification case is judged on its own merits.
Examples of the types of behaviour that can lead to a director’s disqualification include:
- causing significant harm to customers, suppliers, etc
- misusing a company’s assets (eg using or taking company assets for personal benefit)
- breaking the law (eg fraud or not complying with regulations)
- trading while insolvent when there is no hope of the company recovering
You can complain to the Insolvency Service, Companies House or the Serious Fraud Office if you suspect a limited company or its directors of fraud or serious misconduct.