With a revised Statement of Insolvency Practice Number 13 (“SIP 13”) becoming effective on the 30 April 2021, it is a good time to review the topic of phoenix companies as SIP 13 deals with the disposal of assets to connected parties.
There is a common misconception that it is somehow improper to set up a phoenix company to, “rise 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 (England and Wales) Rules 2016 it is quite proper to set up a successor company operating a similar business to the liquidated company and it is often possible to use a similar name.
It is therefore not illegal or improper to have a phoenix company provided that the Insolvency Act and Rules are 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. That surveyor should be reputable, suitably qualified and experienced. They should also have adequate Professional Indemnity Insurance in place.
There are various classes of assets to be valued, not only the physical fixed assets that are owned by the company.
Apart from the fixed and current assets of the business, you must also consider; the value of intellectual property and the goodwill.
Those intangible assets are not so easy to value and must be carefully considered by Chartered Surveyors or other qualified professionals before any sale can take place.
In January 2020 The International Valuation Standards Council (IVSC) published updated guidance on the valuation of intangible assets, which 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.
The physical assets of the company are usually valued by a Chartered Surveyor 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 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 calculates the expected realisable value of the assets on the basis that they are properly marketed, over a reasonable period of time, to achieve the best price.
If a director of the old company wishes to sell the assets of that business to a phoenix company it must be at the higher in situ valuation - and it is best to allow the Liquidator to conduct that sale, as part of the liquidation process.
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 phoenix company unless the Insolvency Rules are first followed. The relevant rules are found in Part 22 of The Insolvency (England and Wales) Rules 2016.
The key rules are Rule 22.4 and 22.5 which state that if substantially all of the assets of the company are acquired by the phoenix company through a liquidation and if the directors of the liquidated company then give the necessary notice, they are then free to act as directors of the phoenix company which is using a similar name.
The notice required can be found in Rule 22.5 and must be sent to every creditor of the liquidated company and advertised in the London Gazette. It is therefore quite a simple and straight forward process, which just needs to be done correctly.
Liquidating a company and having a phoenix company can be quite a technical process, however with the guidance and advice of a suitably experienced Insolvency Practitioner the process can be easily managed.
If you would like to discuss phoenix companies, the re-use of company names, or any other financial matter, please contact Chris Parkman at email@example.com or by telephone on 01326 340579.