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A director may be able to start, buy or become involved in a new business after an insolvent liquidation. A successor company, sometimes called a phoenix company, is not automatically unlawful. Directors often consider a new company because there is a viable business to preserve, employees to protect, assets to purchase or customer relationships that still have value.
The legal risk arises when the same or a similar business continues in a way that leaves creditors misled or prejudiced, repeats unpaid tax liabilities, transfers assets without proper value, or reuses a prohibited company name without complying with the Insolvency Act 1986.
This guide explains when phoenix company activity may be lawful, when reusing a company name can create personal liability, and when the same facts may contribute to director disqualification risk. It also explains the practical steps directors can take to understand their position and protect themselves.
At a glance
- Phoenixism means a business continuing after insolvency through a new or successor entity.
- A phoenix company is not automatically unlawful, but the facts and compliance steps matter.
- Section 216 Insolvency Act 1986 restricts use of the same or a similar name after insolvent liquidation.
- Section 217 Insolvency Act 1986 can make a director personally liable for relevant debts where the prohibited name rules are breached.
- Phoenix conduct may support director disqualification allegations if it suggests unfitness, creditor harm, repeated insolvency, unpaid tax or improper asset transfers.
- HMRC may also use joint and several liability notices in repeated insolvency or non-payment cases.
What is phoenixism?
Phoenixism describes the continuation of a business after insolvency through a new or successor company. The term is often used where directors of an insolvent company set up or become involved in another company which carries on the same or a similar trade.
The new company may use the old company’s assets, staff, customer base, goodwill, premises, website or trading style. In some cases, the arrangement is a legitimate attempt to preserve value after insolvency. In other cases, it may be used to leave liabilities behind while the same people continue the same business for their own benefit.
That distinction is important. The law does not prevent every new company after liquidation. It does, however, impose strict rules where names are reused, assets are transferred, creditors may be misled, or directors continue a failed business model without dealing properly with the consequences of insolvency.
In practical terms, the question is not simply whether a new company exists. The question is how it was created, what it acquired, what name it uses, who controls it, whether creditors were told what was happening, and whether the statutory rules were followed.
What usually happens before phoenix company risk arises?
Phoenix company risk usually arises after a company has entered, or is about to enter, insolvent liquidation. In many cases there will already have been pressure from HMRC, trade creditors, lenders, landlords or a winding up petition. Directors may then be considering whether the business, staff, assets or customer relationships can continue through a new structure.
The next stage can involve several separate risks. A liquidator may review the directors’ conduct. The Insolvency Service may consider whether there is a basis for director disqualification proceedings. HMRC may consider whether unpaid tax liabilities have been repeated. Creditors may ask whether assets or goodwill have been moved into a new company without proper value.
For that reason, decisions made before and immediately after liquidation can have a significant effect later. The safest position is usually to take advice before using a similar name, buying assets, contacting customers, moving staff or presenting the new company as a continuation of the old business.
Is a phoenix company illegal?
A phoenix company is not automatically illegal. There are circumstances where a business, or part of a business, can be rescued through a properly structured sale or asset purchase. Where the route involves administration or a pre-pack sale, the same analysis should be carried out before assets or goodwill move into the new company. The key issue is whether the transaction is transparent, properly valued and compliant with the relevant insolvency rules.
The risk increases where the new business is used to avoid liabilities rather than rescue value. Warning signs include no independent valuation, connected party asset transfers, use of the old trading style without proper checks, failure to notify creditors, repeated unpaid HMRC liabilities or a director continuing to control the business through another person.
Directors should also remember that lawful phoenix activity and director disqualification risk are not assessed by labels. Calling a transaction a rescue, restructure or pre-pack does not make it safe. The underlying facts, documents, value paid, timing, creditor position and director conduct will matter.
What is a prohibited company name under section 216 Insolvency Act 1986?
Section 216 of the Insolvency Act 1986 restricts the reuse of a prohibited name after a company has gone into insolvent liquidation. The purpose of the rule is to prevent creditors and the public being misled where a business appears to continue under the same or a similar identity after the old company has failed.
A prohibited name is not limited to the registered company name. It can include a name by which the company, or part of its business, was known during the 12 months before liquidation. That may include a trading name, brand name, registered trade mark or any similar name which suggests an association with the liquidated company.
This is a common source of difficulty. A director may change the registered name of the new company but continue to use the same website, signage, email domain, telephone greeting or brand. That can still create risk if the practical trading identity suggests an association with the liquidated company.
For more detailed guidance on the name reuse rules, see FWJ’s guide to reusing a company name after liquidation.
Who is caught by the prohibited name rules?
The prohibited name rules can apply to anyone who was a director of the liquidated company at any time in the 12 months before it went into insolvent liquidation. The restriction applies for five years from the date of liquidation.
During that period, the director is restricted from acting as a director of a company using the prohibited name. They are also restricted from being directly or indirectly concerned in, or taking part in, the promotion, formation or management of such a company. The restriction can also apply to involvement in another business using a prohibited name.
The point is broader than formal appointment. A director may create risk by managing the new company informally, directing others behind the scenes, presenting themselves to customers as being in control, or allowing another person to act on their instructions. The same issue can arise where a spouse, relative, employee or associate is appointed as director but the former director continues to make the real decisions.
If a director is already subject to a disqualification order or undertaking, the position is more serious. A disqualified person cannot act as a director or be involved in the promotion, formation or management of a company unless the court has given permission.
Can a trading name, brand name or website name be a prohibited name?
Yes. The prohibited name risk is not confined to the registered name at Companies House. A trading name, brand name, website name, email domain or name used by part of the business may be relevant if it suggests an association with the liquidated company.
This is particularly important where the value of the old business sits in its goodwill, customer base or brand recognition. If customers, suppliers or creditors would reasonably see the new business as a continuation of the old one, the name and presentation of the new company should be reviewed carefully.
Changing the company name alone may not be enough. Directors should also review website content, email addresses, social media accounts, stationery, signage, telephone scripts, invoices, purchase orders, marketing materials and any public-facing descriptions of the business.
Where there is any doubt, the question should be tested before the name is used. Once a prohibited name has already been used, the options may narrow and personal liability risk may already have arisen.
When can a director reuse a company name after liquidation?
There are three main exceptions under the Insolvency (England and Wales) Rules 2016. They are technical and timing is important.
The first exception can apply where the whole, or substantially the whole, of the business is acquired from the liquidator or another relevant insolvency office holder and the required notices are given. The notice requirements include publication in the Gazette and sending notice to known creditors within the required period. Directors should not assume that the insolvency practitioner will deal with this for them.
The second exception is court permission. A director may apply to court for permission to use the prohibited name. If the application is made within seven business days of liquidation, the director may have temporary protection for a limited period while the application is considered. If the application is made later, the name should not be used until permission is granted.
The third exception can apply where an existing company has already been known by the prohibited name for the whole of the 12 months before liquidation and has traded throughout that period. This exception will not usually help if the company was dormant at any time during that period.
These exceptions should be checked before any name is used. Court permission is not generally retrospective, so applying later may not remove liability for debts incurred before permission was granted.
What happens if section 216 is breached?
Breach of section 216 can have serious consequences. A director may face criminal sanctions, director disqualification and personal liability for debts incurred while the prohibited name is being used.
The consequences can also affect other people. A person who acts on the instructions of someone they know is restricted from using a prohibited name may also face liability if they are involved in the management of a company or business using that name.
This is why the issue should be reviewed before trading begins. If the new business has already started trading, the director should take advice promptly on whether the name is prohibited, whether a section 216 exception may apply, whether trading should pause or change, and whether any court application is needed.
Where a director has already received correspondence from a liquidator, creditor, HMRC or the Insolvency Service, the response should be prepared carefully. Inconsistent explanations, incomplete answers or informal assurances can create difficulty if the matter later develops into a personal claim or disqualification investigation.
Can a director be personally liable for a phoenix company’s debts?
Yes, in some circumstances. Section 217 of the Insolvency Act 1986 can make a person personally responsible for relevant debts of a company where the prohibited name rules have been breached.
The practical effect is that a director who thought they were trading through a limited company may lose the protection of limited liability for certain debts. The timing of the debt, the period during which the prohibited name was used, and the director’s involvement in the company or business all need to be considered.
Case law shows that section 217 can be a significant risk. In PSV 1982 Ltd v Langdon, the courts considered personal liability under sections 216 and 217 in relation to debts of a company using a prohibited name. The case is a reminder that directors should not assume that the risk is limited to small or short-term trade debts.
The position can also work the other way. In Maxima Creditor Resolutions Ltd v Fealy & Anor, the court considered the existing company exception under rule 22.7. The case illustrates that section 216 and section 217 issues are fact-sensitive and that proper timing, trading history and evidence can matter.
How can phoenixism lead to director disqualification?
Phoenixism does not automatically lead to director disqualification. The Insolvency Service and the court will be concerned with whether the director’s conduct shows unfitness.
Phoenix conduct may become relevant where the facts suggest that the director used insolvency to avoid liabilities, transferred assets without proper value, continued trading to the detriment of creditors, misled creditors, failed to keep proper records, or failed to cooperate with the liquidator or the Insolvency Service.
HMRC debts are often important in this context. Repeated failure to pay VAT, PAYE, National Insurance contributions or corporation tax may form part of a wider allegation that the director allowed companies to fail while continuing the same or a similar business through a new entity.
A disqualification order or undertaking can prevent a person from acting as a director or being involved in the promotion, formation or management of a company without court permission. Breach of a disqualification restriction may also create criminal and personal liability risk.
The wider Company Directors Disqualification Act 1986 regime explains how disqualification orders, undertakings and restrictions on management can affect directors after insolvency.
What if HMRC alleges phoenixism?
HMRC may become involved where a failed company leaves significant tax liabilities and a new business appears to carry on the same or a similar trade. HMRC may examine whether unpaid tax has been left behind while the economic benefit of the business has continued through a new entity.
This may create several different risks. HMRC may object to a proposed arrangement, seek security for future tax, pursue recovery options, or consider whether the facts support a joint and several liability notice. The same factual background may also be referred to the Insolvency Service for possible director disqualification action.
Joint and several liability notices are a separate tax enforcement mechanism. Under Schedule 13 Finance Act 2020, HMRC may issue notices in certain tax avoidance, tax evasion and repeated insolvency or non-payment cases. A notice can make directors, shadow directors or certain connected individuals jointly and severally liable for amounts owed to HMRC.
A director facing HMRC phoenixism concerns should separate the issues carefully. The tax debt position, any security demand, any JSLN risk, and any director disqualification risk may overlap, but they are not the same legal process.
Where HMRC alleges that repeated insolvency has left unpaid tax behind, directors may need advice on HMRC claims against directors as well as any connected phoenix company risk.
What evidence can help show that the new company is legitimate?
Evidence is central. A director who can show that the new business was properly structured will usually be in a stronger position than a director who relies on informal explanations after the event.
Useful evidence may include independent valuations, a written asset purchase agreement, proof of payment, board minutes, insolvency practitioner correspondence, creditor notices, Gazette notices, tax records, separate bank accounts, updated website and branding records, and evidence that the new company has not misled creditors or customers.
Where HMRC claims are involved, evidence of tax compliance planning, time to pay discussions, accurate filings, separate accounting and realistic cash flow forecasting may be important. Where the issue concerns director conduct, evidence of professional advice and careful decision-making will usually be important.
Directors should avoid trying to reconstruct the history from memory only. Documents created at the time usually carry more weight than explanations given later.
What should a director do if they have already reused a company name?
If a director has already reused a company name, trading style or brand after liquidation, the first step is to assess whether the name is prohibited and whether any exception applies.
The director should review when the old company entered liquidation, whether they were a director within the previous 12 months, what name the old company used, what name or trading style the new business is using, and whether there has been any involvement in the promotion, formation or management of the new company or business.
If no exception applies, the director may need to stop using the name, change the company’s trading identity, cease involvement in management, or consider an application for court permission. However, permission will not usually remove liability for debts already incurred before permission is granted.
It is important to deal with this calmly and in the right order. A rushed name change may not solve the underlying issue if the same name remains on websites, email domains, invoices, signage or customer communications. Equally, resigning as a director may not be enough if the individual continues to control the business informally.
Can a disqualified director be involved in a phoenix company?
A disqualified director must not act as a director or take part, directly or indirectly, in the promotion, formation or management of a company unless the court has given permission. These restrictions apply even if the individual is not formally appointed at Companies House.
In a phoenix company context, risk may arise if a disqualified person appears to be running the new business through another person, giving instructions to the appointed director, negotiating with suppliers, controlling payments, dealing with customers or making management decisions.
A disqualified person may apply to court under section 17 of the Company Directors Disqualification Act 1986 for permission to act in relation to a specific company. Such applications are fact-sensitive and usually need evidence explaining why permission is needed and how the public will be protected.
Directors and associates should take advice before involving a disqualified person in any new or successor business. The fact that the person is not named as a director does not, by itself, remove the risk.
How can FWJ help with phoenixism and director disqualification risk?
FWJ advises directors, shareholders and business owners on phoenix company concerns, prohibited name rules, personal liability, HMRC claims and director disqualification proceedings.
We can help directors assess whether section 216 applies, whether any exception is available, whether a court application is needed, and what steps should be taken to reduce avoidable personal risk. We can also advise on related issues such as liquidator claims, misfeasance, HMRC tax claims and director duties in financial distress.
Where a director has received an Insolvency Service questionnaire, section 16 letter, notice of intended disqualification proceedings or HMRC correspondence alleging repeat phoenix behaviour, early legal advice can help ensure the response is accurate, consistent and supported by evidence.
For advice on an existing or threatened investigation, directors can speak to FWJ about director disqualification proceedings, Insolvency Service correspondence and related phoenix company concerns.
Francis Wilks & Jones is the county’s leading firm of director disqualification solicitors. We are genuine experts in what we do with a combined experience of over 75 years in director disqualification claims. Contact one of our friendly solicitors now for your consultation.
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