Company directors abusing insolvency system to avoid paying creditors, research suggests

Experts express concern over ‘phoenix’ firms, created by directors to buy up assets of their own firm before it goes into administration, then trade under a new name

Despite the potential for abuse, just 23 such sales were referred for scrutiny in 2017 (Shutterstock)

Company directors are dodging measures designed to stop abuse of the insolvency system so that they can avoid paying their creditors, new research suggests.

Experts have expressed concern about the number of “phoenix” companies, which are created by directors after a firm is put into what’s known as a pre-pack administration.

In a pre-pack, a company’s assets are sold before an administrator is appointed. The company can then legally start up again under a new name, but often the same directors, or people linked to them, buy up the assets, while creditors are left with unpaid invoices.

Despite the potential for abuse, just 23 such sales were referred for scrutiny in 2017 by the Pre-Pack Pool, the independent review body set up to police the system, research from accountancy firm Moore Stephens shows. The number was down by more than half from the 49 recorded in 2016 despite the total number of corporate insolvencies rising 4 per cent in that time.

Half of the 371 pre-pack administrations between November 2015 and January 2017 involved a purchase by a connected party, the Pre-Pack Pool found.

Moore Stephens said phoenix pre-pack administrations can, when done correctly, give businesses a second chance to succeed and save jobs.

The fall that occurred suggests the connected-party purchasers of the business concerned have become increasingly wary of opening these deals up to examination, Moore Stephens said.

Brendan Clarkson, head of national creditor services at Moore Stephens, said it was disappointing that even fewer phoenix-type pre-pack sales were putting themselves up for independent scrutiny.

“The fact that the Pre-Pack Pool is still being woefully underutilised can only be bad news for wider confidence in the pre-pack process and the creation of phoenix companies,” he said.

“Pre-packs and the resultant phoenix companies can offer a viable way forward for a business, but all too often they are seen as being a way of gaming the system and ridding a failing business of its liabilities.

“If the same management are going to get a second chance at running a failed business, then it seems reasonable that the Pre-Pack Pool is given oversight of the process.”

Moore Stephens said that there had been no changes in market trends that would explain the sharp decline in overall pre-pack deals and subsequent precipitous decline in pre-packs being reported to the pool.