Finance: Issue of phoenix firms rises again

In response to our earlier article on insolvency, Katherine Campbell argues that the legislation is well intentioned, but there is perhaps not enough protection for creditors against the few unscrupulous directors determined to start up again at any cost.
Click to follow
In response to John Kelly's article (29 October), whilst I have sympathy with Mr Kelly's views on "genuine entrepreneurs", I do think that we need to look more closely at the concept of phoenixes and exactly what the insolvency legislation seeks to prevent.

The insolvency rules provide that a director of a company cannot, within five years from commencement of a liquidation of the company, become a director of a company known by a prohibited name or take part in such a company's management. A prohibited name is a name by which the insolvent company was known during the 12 months prior to the commencement of the liquidation or a name which is so similar that it suggests an association with that company.

There is no general ban on directors starting in business again with the assets of the old business (properly acquired), provided a new name is used. Although this will mean that they will not have the benefit of any goodwill attaching to the company name, one would have thought that legitimate business people who have simply been beset by difficulties beyond their control would have sufficient personal goodwill to take with them into any new business venture.

The insolvency legislation also has exceptions from the ban on the use of prohibited names. For instance, if a company purchased the business of a liquidated company, then provided it gives the requisite notice to the liquidated company's creditors, it can use a prohibited name and can also name former directors who will be acting in the management of the new company.

If all else fails, the insolvency rules provide that leave of the court can be obtained to re-use a company name. In coming to a decision, the court will look at the circumstances surrounding the insolvency and the responsibility of the applicant for its insolvency. In this way, genuine business people will have an opportunity of telling the court about the circumstances and putting their case forward for starting up a new business with the same or a similar name.

It seems that there is therefore protection for the legitimate director if he needs it and is determined to start up business again. One must, however, look at the situation from the creditor's point of view. All too often phoenix companies are set up without following the above procedures. The directors ignore the Insolvency Act, have no regard for their creditors and know there are no funds available to any liquidator to pursue them. Creditors need protection, although it is accepted that there are ways of minimising business risks through credit checks and good credit management. Unfortunately, the minority of directors who are less than honest are by their very nature very difficult for creditors to protect themselves against. Such a minority of directors will use the veil of incorporation to their advantage to exploit trade suppliers time and time again.

The law as it stands is well intentioned. It aims to prevent fraudulent re-use of a company name where it is clear that creditors will be at substantial risk. It is not designed to stifle genuine business activities, but to achieve a balance between protecting the interests of directors and those of creditors. Any government initiative must therefore consider the interests of both parties to redress the balance in favour of creditors, whilst allowing legitimate entrepreneurs to try again.

The author is an associate in the Coventry office of solicitors Warner Cranston.