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  • robmarkwell

The Phoenix Company Taboo


They say 20% of businesses fail within one year and 60% within three years.

 

Those statistics are often quoted to highlight how hard it is to start a business. But surviving the three year mark doesn’t mean it will be plain sailing. Like many industries, the recruitment market has been severely impacted by Brexit and Covid. And while some have negotiated the obstacles with grace, many didn’t make it, and even more are still picking themselves up.

 

Put simply, business survival is never guaranteed.

 

If you ever speak to a driven business owner, the idea of turning off the lights is always the very last resort. Most would rather climb through barbed wire to jump into a bath of vinegar before calling it a day.

 

However sometimes it really is the end of the road. The company is insolvent and the professional (and correct) advice is to liquidate.

 

In some cases, the Directors hang their hat up, in other cases a Phoenix Company is set up.

 

A Phoenix company is (as defined by HMRC):

 

the term used to describe the practice of carrying on the same business or trade successively through a new company. The initial now insolvent company’s business, but not its debts, is transferred to the new, similar ‘phoenix’ company.

 

….When a company goes into administration or liquidation, the administrator or liquidator will try and get in as much money as possible to pay creditors. Sometimes the best offer will be from the former directors or owners to buy back part or all of the business, including the company’s name or trading name. This is sometimes called a ‘pre-pack’ administration. The law allows this.

 

So if the law allows for this, why is it so taboo and tarnished with such a negative brush?

I am not for a second promoting the frivolous use of this practice but like many things in life, it simply isn’t that black or white.

 

The answer is in the grey.

 

The perception of a phoenix company might be that it is a sign of a badly managed business, a failing concept, one that doesn’t offer secure employment or reliable services. It may also not be seen as a safe bet for lenders.

 

And understandably those concerns are real and justified. Phoenix companies may put off certain candidates. If your competition find out they are sure to use it to their advantage when fighting over candidates and clients. No punches spared.

 

So why bother you may ask? Why not just accept defeat and take it on the chin.

 

 

Well that is always an option and there is no shame in that. From my experience, there is no bigger critique of entrepreneurs whose business has failed than the entrepreneurs themselves.

Whatever your business, its lifespan, its success… you had a go where most never had the courage. Those who tried get my full respect every time.

 

But what if you’re no ready to give up?

 

What if the reason your business is facing liquidation is because of one client going under owing you a larger sum of money. Maybe one Director dragged the business down and it’s an opportunity to cut ties, perhaps Covid just put you into a far bigger hole than your treasure chest can deal with.

I was told that when racing round a track and the back of the car starts to slide in a sharp corner, you shouldn’t stare at the barrier but keep focussed on the road ahead and eventually you will find grip and you’ll keep going. Sometimes a phoenix is the “grip” you need.

 

As Directors you have a duty to limit the exposure of your creditors. That’s anyone from landlord to employees and every supplier in between. If you are honest and professional with the right advice from a qualified lawyer, insolvency practitioner and external advisers, you can do the right thing. You can minimise the impact on your suppliers, you can save jobs and you can get the train back on the tracks. Yes it won’t be easy, yes it will be stressful, and yes you will be judged but this is why the law allows this. It can be the best way to avoid leaving a huge mess and allowing a business with genuine potential to get a second wind.

 

The problem is always when it is abused. When underhand Directors use is it systematically and with malicious intent in order to never honour their financial commitments. The law also has ways of dealing with them.

 

As always it come down to communication. And as delicate as it can be, honesty is often the best policy. Banks, landlords and staff are often better reassured when there is a clear and well thought through plan being communicated.

Equally be ready to be questioned on it by potential new hires down the line. This is ok for them to do; it is their livelihood. A company would question something unusual on a CV so it’s only right it’s a two-way street.

 

One thing I would say is that I have seen more malpractice around employment law such as contractual commission not being paid, notices not being paid, discrimination, all the way to companies fraudulently using furlough pay… than I have seen phoenix companies being a concerning place to work.

 

Like every thing in business, it comes down to how you behave and your culture.

There is always a way. Just make sure you do it the right way.

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