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First, let's start by seeing what is meant by the term "Phoenix Company".

A phoenix company ("Newco") is one that rises out of the ashes of an old company ("Oldco") quite often following the Liquidation of that Oldco.  It is for that reason that phoenix companies often have a bad press, as creditors of the Oldco know the exact extent of the degree to which they have financially suffered and perceive that something either illegal or improper has been done.  It is that perception that this page considers.  In the majority of cases, the perception is incorrect if the director of Oldco has acted both within the law and the spirit of the law.

What is the law?

Even the law initially seems to be at cross-purposes when it comes to the legislation for phoenix companies!  That might be because the legislature policy may wish to encourage the revival of such companies, as the Rolls Royce's of this world, but may be more ambivalent about "phoenixes" being used to restructure a twenty employee Cardiff based company!

So what different laws discourage the improper use of phoenix companies?

The first law addresses the "name" of the successor company.  Section 216 of The Insolvency Act 1986 does not use the words "phoenix company", but that is what the section is, in part, about.  The section "prohibits" the future use of the Oldco's name.  So if our fictional Cardiff Oldco was called Joe Bloggs Engineering (Cardiff) Limited and the owners set up a Newco called J Bloggs Engineers Limited (ie, a similar name), then that new name would be a prohibited name (unless certain positive actions were taken). 

So What?

It is a big "so what" - as that person who was a director of the Oldco and the Newco with the prohibited name, is automatically personally liable for the company's debts!  In other words, the successor business does not have any limited liability protection even though it is styled as being a limited company!  That is not the end of the story for the director involved as that director:

  • Is also liable to a fine.
  • Has committed an offence that will be taken into account by the DTI when considering if the director should be disqualified from so acting in future. 
  • May also be imprisoned! 

OK - So how does the law allow such companies as Rolls Royce to restructure, "leave creditors behind" and allow the directors to continue to use the same or similar name?

To find the answer, you have to dig into the Insolvency Rules 1986.  Here I will give you the gist of the Rules.  There are 3 exceptions available if the Newco is going to be able to use a "similar name" to the Oldco.

  • The Court might, on application, allow the Oldco name to be reused.
  • A further exception arises if the Newco had traded and had been known by the prohibited name for at least 12 months before the Liquidation of Oldco.
  • In many instances, these 2 exceptions are of not much use.  It is the last exception that more often than not permits a Newco to adopt what otherwise would be a prohibited name

re-using a company name

(Sections 216 & 217 of the insolvency act 1986)

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