Cromwell Seymour Group Ltd

What is a Phoenix Company

The vast number of businesses that fail do not do so as a result of company directors acting either improperly or incorrectly. New companies can be set up to carry on a similar business as insolvent companies, without attracting the scrutiny of HMRC.

A phoenix company is a new trading entity that carries on the same work as a company that ceased trading. The name comes from the fact that the new company has “risen from the ashes” of the old one. The company that has become insolvent ceases to trade and will be either dissolved, liquidated or placed in administration, allowing its assets to be purchased by the new trading entity. If desired, existing contracts can be transferred to the new business and it carries on without the burden of the previous company’s debts.

It is important for the directors of the old company to show that this will benefit the creditors and that they will receive a better return by following this process.

freezing orders

Any assets of the old company must be sold/transferred at a proper market valuation, failing which creditors such as HMRC are likely to challenge the process. It is therefore vital that independent valuations are obtained (and retained). If the proper procedures are not followed then the directors can face allegations that they are simply walking away from their responsibilities and can, in certain circumstances, face challenges or actions against them personally.

It is also worth bearing in mind that a phoenix company can only come into being where the insolvent company cannot be saved.

HMRC's Control

HMRC has introduced new regulations to ensure that liability for such as Income Tax is not avoided. These include the responsibility to show that:-

Shareholders have to hold at least 5% equity and voting interest. These must be in place before any liquidation commences.

The old company has been, in at least the 2 years before being liquidated, a “close company”, in other words, it has no more than 5 participants

The new shareholders are involved in a similar business within two years of the old company failing.

Thus, it is imperative that directors keep clear and unambiguous records, detailing the reasons for any liquidation, together with documents dealing with the valuation, marketing, and sale of the old company. As and when any gain results, then full proper disclosure can be made.

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