Phoenix Companies, Insolvency Law and Recovery by Creditors

The Register of Companies is littered with cases involving so-called ‘Phoenix companies’ – ones which fail and then seemingly reappear overnight in substantially the same form and with substantially the same management. Typically, a Phoenix company will use some or all of the assets of the insolvent company (such as stock, premises, equipment and so on) and will trade in the same industry as, and in a similar way to, its failed predecessor. Also, the name of the Phoenix company is frequently similar to that of the failed company.

The track records of Phoenix companies tend to be very poor – which is no real surprise since most are simply replicating a business model which has already failed. Accordingly, insolvency law attempts to safeguard the creditors of the new company, many of whom are likely to have suffered losses as a result of the insolvency of the predecessor company.

This protection can include, in appropriate circumstances, making the new company responsible for the old company’s debts. One such circumstance is where the new company effectively takes over the business of the old one without giving the creditors of the old company appropriate notice.

The Court of Appeal recently issued a judgment that such a notice had to be given to the creditors of the new company before the directors started to manage it: giving notice after the company was up and running, under the same management as the insolvent company, was not good enough. The decision means creates a limited exception to the general principle that a company is primarily liable for its debts; and allows a means to side-step the application of the principle that a separate legal personality to other companies.