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Monday, 2 September 2013

Phoenix companies - Are they going to become more common place?

Now that the economy is beginning to improve business owners are thinking of stopping unviable businesses and starting again.  The so called use of a "phoenix company" or "pre pack" may become more commonplace.  This is where a new unencumbered company rises from the ashes of the old indebted company to carry on the business.

Some feel the practice allows directors to escape debts too easily and others say it is a natural recycling of failed businesses....  What is your view?

The problem is really what is the alternative?  If someone (maybe the previous directors) can come along and buy the assets of the old company when no one else will, does this not benefit the creditors?  Like so many mechanisms it has to be used properly.  In many cases a pre pack is the only way that a business can carry on trading as a particular creditor refuses to support the company but they are crucial for the operation of the business.  This may be a landlord or IT supplier for instance.  The problem is when directors have form with previous failures. In this case it is likely that if they owe HMRC a significant amount of money then they will be expected to come up with a VAT or PAYE deposit to protect against another failure.  In any pre pack the bank may not approve it.

Strictly speaking a pre pack liquidation is a bit of a misnomer.  It is really a term to cover both situations;  A  pre pack administration or the creation of a phoenix company.  The key is timing.  A pre pack is where the business is sold at the same time as the old shell of the company is put into administration.  A phoenix company does not have to emerge at the same time as the old company is put into liquidation.  Although it does tend to emerge soon afterwards to try and pick up customers and have some sort of continuation.

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