Will we see phoenix companies soar post lockdown?

Phoenix companies – this is a term used to describe a situation where a company goes into liquidation, but the business ‘rises from the ashes in a new company.

The rights and wrongs of such a situation are often debated and the views are often based in whether you are a creditor of the insolvent company and have lost money, or a director of the company who relies on the business as a means of earning a living.

The legal position is that there is no prohibition against an individual acting as a director of many companies and provided that the directors have behaved responsibly and honestly, they can continue to carry on in a similar business, even after a Liquidation.

Additional protection for creditors is intended to be achieved by virtue of the Directors Disqualification regime.

In every Insolvency, the Insolvency Practitioner is required to submit information to the Insolvency Service Disqualification Unit, who then decide whether to act against an individual.

The Insolvency Service can apply to the Court for an order against a director making it a criminal offence for that person to act as a director of other companies for between 2-15 years. To avoid going to Court, the individual can provide a legally binding undertaking to the same effect as a Court Order.

There are approximately 1,200 disqualifications, in around 18,000 total company insolvencies each year.

So how common is Phoenixism?

Even in normal times, very, would be the simple answer. The bare truth is that once an individual is minded to go into business, even if the business fails, they are likely to want to try again. In fact, many well-known businesspeople have business failures in their past, before becoming successful, including Walt Disney and Henry Ford.

phoenix companies

What about post lockdown?

It has now been over a year since the government introduced support for businesses affected by Covid-19. However, at some stage the stabilisers will have to come off, the support cannot last forever, and directors of debt burdened companies will need to find a way forward.

What debts are likely to have accrued?

Some companies will have paid no rent for over a year and Directors may find themselves with expensive company leases for properties they no longer need or want. Walking away from a lease is not simple and can be expensive. As well as the arrears of rent, directors need to consider how long a term is left and what dilapidations (the cost of repair and making good the property) the company has incurred.

Many companies are also in a payment plan with HMRC to pay the VAT previously deferred.

Any CBILs and Bounce Back loans will also need to be serviced.

All of this will arise when there may be a lack of working capital in the company. It is inevitable that some companies will have incurred exceptional and unavoidable debt over the last 12 months, and it may be difficult to know what to do next.

Could redundancies be an issue?

Once answer, to cut costs, may be to reduce employee numbers. However, the cost of making redundancies may simply be unaffordable. There may also be a requirement to enter into consultation with employees and pay notice and redundancy at a time when the company simply does not have the money to do so.

Could liquidation be the answer?

No one would ever want to place their Company into insolvent liquidation and to do so is a difficult emotional decision.

In a liquidation, debts stop rising and creditors are not exposed to future losses. Employees are able to make claims to the Redundancy Payments Office for monies they are owed, rather than risk working for a company, which, at the end of the month may not be able to pay them. If leasehold properties are no longer required, whilst landlords may lose a tenant, at least they have a property back that they can lease elsewhere, rather than having a tenant costing them money.

phoenix companies

Phoenix companies – how does it emerge from the flames?

In some cases, without the burden of debt that has arisen over lockdown and with the ability to exit a lease and /or make staff redundant, it is possible that the underlying business is viable and can be saved through a Liquidation.

There are lots of rules to prevent an abuse of the process, but the opportunity does exist for an insolvent company to be wound up in liquidation and the business carried on by a new company.

This releases the business from the old company’s debt, with the creditors of the old company receiving the value of the old companies’ assets, which may be purchased by the new company.

The key considerations:

  1. Is the underlying business actually viable?
  2. Or will liquidation enable the business to reshape to become viable?
  3. Can the new company afford to purchase the required assets at proper values?
  4. Are the creditors of the old company being treated fairly?

It is very important when considering the options to ensure that if a phoenix situation is being contemplated, that proper professional advice is obtained from a licenced and regulated professional.

We have seen numerous examples where directors have been ‘sold the dream’ of a debt free phoenix company, by unscrupulous advisors, which have turned into nightmare situations.

How could the new company be funded?

The new company will need working capital and cashflow available to get up and running as well as funding to buy the business and assets from the liquidator.

It is likely as businesses reopen, that asset based finance will be available to enable assets to be purchased and book debt finance will become available to provide working capital, as the business re-grows.

So will we see a rise in phoenix companies?

It would seem likely that otherwise viable businesses coming out of the restrictions of the last year burdened with unaffordable historical debts, will have to consider the possibility.

Provided there is a viable underlying business and the process is carried out correctly, with transparency, it could be a case of making the best out of a bad situation, enablesing viable businesses to continue to retain employees and generate future taxes to pay for the government support over the last year.

AUTHOR: Nicola Layland (Director)