So what is a phoenix company?
A phoenix company is a company that is set up by the directors of a company which has a similar name to a company which has recently gone into liquidation. As an example if a company called John Smith Limited goes into liquidation and the directors set up a new company called John Smith 2012 Limited then John Smith 2012 Limited will be known as a phoenix company.
What are the problems with being a director of a phoenix company?
If you trading a phoenix company then you might be personally liable for all the debts of the phoenix company.
Section 216 and 217 of the Insolvency Act 1986 states where a company has gone into insolvent liquidation and you were a director or shadow director of the company at any time with in one year before the company went into liquidation. A company name is a prohibited name if it is a name by which the liquidating company was known at any time in the last year or it is a name which is so similar to the liquidated company name as to suggest an association with that company. This applies to any trading style or trading name as well as the actual limited company name.
This applies for 5 years from the date the company went into liquidation and you should not be a director of a company with a similar name or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any such company, or in any way, whether directly or indirectly, be concerned or take part in the carrying on of a business carried on (otherwise than by a company) under a prohibited name.
If you are involved in a phoenix company then you acts in contravention of this section, then criminal proceedings can take place whereby you can be liable to imprisonment or a fine, or both.
How do you avoid being personally liable for the debts?
There are three ways to avoid personal liability.
- By purchasing the whole or substantially whole of the business from the liquidator, giving all known creditors of the insolvent company notice and publishing the fact in the London Gazette. This must be done within 28 days of after completion of the sale and be in the correct form.
- Apply to Court for permission to act as a director of the company.
- Court permission is not required when a trading (not dormant) company with a similar name to the liquidated company has been trading for one year prior to the liquidation.
To find out more about phoenix companies please contact us