Tim Carter, Head of Restructuring & Insolvency examines what is meant by phoenixing and the provisions – ss 216 and 217 of the Insolvency Act 1986 (IA86) – which are designed to curb this practice, together with how any director who might be caught may be able to avoid criminal and civil liability. In this article Tim further focuses on the far-reaching implications this legislation may have on “innocent” directors and the (surmountable) hurdle it might have for fund-raising and restructuring projects that a company may typically undertake.
Finally, Tim explores in more detail a recent case in which such issues arose, the way that the issues were tackled and summarises the takeaway points.
THE “PHOENIX PHENOMENON”
For the ten years after their introduction by IA86, ss 216 and 217 were little used. However over the past ten years this has all changed and their profile raised, having been regularly used by creditors (especially HM Revenue and Customs) as a debt recovery tool and by being the subject of judicial scrutiny with the resulting plethora of reported case law.
Their introduction originally sought to combat the “phoenix phenomenon” by protecting the public from unscrupulous directors, who habitually transferred the business of their failed old company (OldCo) to a new company (NewCo), leaving the debts of OldCo behind. Often, these directors would operate from the same address and use the same or a similar name for NewCo in order to cash in on any goodwill which OldCo, or its trading name, may have had. Creditors would therefore easily be confused and unbeknown to them, whilst trading with NewCo, would be unable to recover the debts owed to them by OldCo, which typically had then entered some form of insolvency process. These directors simply hid behind the shield of limited liability, leaving disgruntled and unpaid creditors in their wake.
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Article first published in Butterworths Journal of International Banking and Financial Law and is accessible online via LexisLibrary.