Phoenix Companies

Welcome to this week's Insolvency blog from Purnells.

This week we shall be looking at Phoenix Companies (Companies that are set up to take over the business of a Company that has been put into liquidation).

There is a common misconception that it is illegal or somehow improper to set up a phoenix company out of the ashes of a business that has gone into liquidation. By following the law that is found in The Insolvency Act 1986 and The Insolvency Rules 1986 it is quite proper to set up a successor entity similar to the liquidated predecessor business.

It is therefore not illegal or improper to start up a phoenix following the liquidation of the original company. The big proviso is that the Insolvency Rules 1986 must be followed to the letter.

If those Rules are not followed the responsible director can be fined, imprisoned, disqualified and made personally liable for the debts of the successor business (Sections 216 and 217 of The Insolvency Act 1986). The process must also be in the interests of the creditors of the original company..

A professional valuation is the key to having a legitimate sale of assets from one company that is being liquidated to another company (the phoenix company). The sale of assets to the phoenix company should be in accordance with a Chartered Surveyors market valuation.

There are various classes of assets to be valued not only the physical fixed assets owned by the company.

Intangible assets

Apart from the fixed and current assets of the business, you must also consider; the value of intellectual property and the value of goodwill.

The above intangible assets are not so easy to value and must be carefully considered by Chartered Surveyors or other qualified professionals before any sale transaction takes place.

In March 2010 The International Valuation Standards Council (IVSC) published its updated guidance note (GN4) on the valuation of intangible assets. GN4 identifies the principal techniques that are recognised for the valuation of such intangible assets as brands, intellectual property and customer relationships. It gives guidance on how these techniques are applied.

Tangible Assets

The physical assets of the company are usually valued by the Chartered Surveyors on the following three bases:

1. Forced sale value - otherwise known as the Estimated Restricted Realisation Price, which essentially means the amount that can be expected at an auction,

2. Market value,

3. Value to the business (Otherwise known as the in situ valuation)

A market valuation will in most cases derive a higher valuation than a forced sale. A market valuation provides the expected realisable value for the assets if they did not have to be sold quickly and instead time was available to test the market for the best price.

If a director of the old company wishes to sell the assets of that business to a successor phoenix company it must be at the higher in situ valuation - and it is best to have the transaction either confirmed by creditors consent or have the sale conducted by the liquidator.

Company Name/Goodwill

The general rule is that there is a complete bar on the re-use of a liquidated company's registered name and trading name by a re-start phoenix company unless the Insolvency Rules are first followed. The relevant rules are Rule 4.228 - Rule 4.230 and those can be found on the website by following the link.

The penalty for infringement of these Rules can be imprisonment, fine and/or personal liability for all of the debts of the successor company should that company also fail at some time in the future.

However, there are exemptions to this, which allow the Company name to be reused and these will be covered in next week's blog.

As always, Should you wish to discuss phoenix companies or any other insolvency matter in more detail, please do not hesitate to get in contact. Telephone: 01326 340 579, Email: ale@purnells.co.uk