Phoenix Companies - Kent Business Nov 09
28 October 2009
Increasing business failures usually mean a higher incidence of the so called phoenix syndrome, i.e. a company failing and then rising up from the ashes, leaving all the debts behind but continuing to have the benefit of the company’s name and goodwill.
The law seeks to strike a balance between encouraging entrepreneurship (not regarding the failure of a business as necessarily culpable) and protecting third parties such as creditors. Administrations will often involve a sale of the business to the former directors and the reality is that if they are prepared to pay more for the business than any third party, that is the best outcome the creditors can hope for. What is important is that the business assets are sold for full value but obviously any asset is only worth what someone is prepared to pay for it and in the current economic climate potential buyers are not exactly falling over themselves to buy assets from failing businesses.
There is however particular protection for creditors when a company goes into insolvent liquidation, whether directly or after a period of being in Administration. If a director of the company held that office at any time during the 12 months prior to the liquidation, he cannot be a director of another company with the same or a similar name to the liquidated company for 5 years following the liquidation, except in certain circumstances. Briefly, those are where:
1. The director obtains leave from the court,
2. the business is acquired by the successor company under arrangements made by an Insolvency Practitioner on behalf of the liquidated company and the prescribed notice is given to the creditors of that company, or
3. the successor company has been known by the name in question during the whole of the 12 months before the liquidation and it has not been dormant during that period.
If these provisions are ignored and a former director acts as director in the successor company or takes part in its promotion, formation or management in contravention of them, he commits a criminal offence and may also be held personally liable for the debts of the successor company.
1.I
Shirley Moore
Partner
Head of Debt Recovery & Insolvency
Brachers LLP
www.brachers.co.uk
01622 690691
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