"Phoenix" companies 

and 

Administration Prepacks

Sometimes, a company gets into financial difficulty, the Directors let it "go under" but start up another company with a very similar name, and often trading from the same premises, using the same telephone number, employing the same staff

Such Directors need to consider the following

 

Wrongful trading.

A director may be personally liable if he trades a company, knowing that it is unable to pay its debts.

This might mean that the creditors might try to persuade the Liquidator of the Company to go after the personal assets of the Director in respect of those debts which the Company ran up after the point at which he should have realised that the company had no chance of survival

 

Directors duties.

If the Director is a director of both companies at the same time, he owes each of them a duty not to undermine it, by sliding off opportunities/contracts/enquiries to a competitor (even if the competitor is owned by him)

Again it will be for the Liquidator of the old Company to seek funding from the creditors to take the Director personally to task and come after his personal assets in respect of the profits that those opportunities/contract/enquiries might have made.

Essentially, the Liquidator will be looking at the profits of the new company

 

The Name.

The Insolvency Act deals with "Phoenix" companies and prohibits a director of one trading entity going into liquidation using the same or similar name in connection with another trading entity

It does not matter whether the name is the name of the limited company or simply a trading name

If the new company is not "rising from the flames" like a true Phoenix company, but  is already up and running, the legislation provides that the Director should be running that new company for 12 months before he is in the clear

 

 

Guarantees

The Director may have personally guaranteed the bank overdraft/loans of the company and he will need to reconcile himself to having to pay them back out of his personal assets

If he pays down the bank in preference to other creditors (in order to reduce his personal liability) then this can be attacked by a Liquidator of the Company

 

Administration Prepack

A Buyer is found for the business of the which is about to go into administration, all documents are agreed ("prepack"); and on a given day, the Company announces that it has gone into administration and that his business has been sold to the Buyer for whatever price

Sometimes, the sale is at an arms length to a trade competitor or some other interested party and sometimes, it is to the old management.

Creditors are usually highly incensed, especially if the sale is to the old management.  They complain that the best price was not obtained, the business was not exposed to the market for competing offers to be made – basically, they complain that it is all a "stitch up"

For that reason, the Licensed Insolvency Practitioner endorsing the deal must be very careful.  He must obtain valuations and in some cases, find some way of "testing the market"

The Licensed Insolvency Practitioner has to be prepared to justify the sale at the price received, primarily by showing that the price received was going to get more for the creditors than a pure liquidation

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