What is a Phoenix Company and are they legal?

What are the rules governing Phoenix Companies?A Phoenix company is a type of business that insolvency practitioners (IPs) in the United Kingdom use to try and rescue a business that is insolvent. IPs may also use this process to liquidate a company. The process involves the formation of a new company, which takes over the assets and contracts of the insolvent company.

This can be done through the purchase of the insolvent company’s assets or by taking on its existing contracts. The insolvent company is then wound up, and the new company takes its place. The name “Phoenix” comes from the mythological bird that rises from the ashes of its predecessor.

This type of business insolvency is also known as “pre-pack administration.” While Phoenix companies have been criticised for being used to avoid debts, they can also be seen as a way to save jobs and businesses that would otherwise be lost

What are the rules governing Phoenix Companies?

A business is classed as insolvency when it is unable to pay its debts as and when they fall due. The insolvency law in the United Kingdom is governed by the Insolvency Act 1986 (as amended) (“the Act”). The purpose of the insolvency law is to strike a fair balance between the interests of creditors and debtors.

The insolvency law tries to achieve this by providing for a reasonable division of assets among creditors, and by giving debtors a fresh start. The insolvency law also contains provisions that prevent phoenix companies from unfairly prejudicing the rights of creditors. A phoenix company is a company that is formed to take over the business of an insolvent company.

The directors of a phoenix company may be liable under the insolvency law if they have transferred assets from the insolvent company to the phoenix company, or if they have taken other steps that are unfair to creditors. However, there are certain defences available to directors of phoenix companies, and it is possible for a phoenix company to operate within the insolvency law.

If you are considering forming or buying a phoenix company, you should seek legal advice to ensure that you comply with the insolvency law.

What are the rules for setting up a Phoenix Company

There are many reasons why companies fail, not always being due to directors’ wrongdoing. This means that UK law allows company owners and board members alike carry on trading in the same way they did before so long as those involved individuals aren’t personally bankrupt or disqualified from holding office as a director for other reasons like having committed specified crimes against persons related with business deals.

In order for the business not to be a Phoenix company the following must be compiled with:

  • The assets of the old company must be advertised and marketed properly by a chartered surveyor or auctioneer to ensure the best outcome and purchased for a fair price.
  • The creditors’ interests are not compromised by pre liquidation investigation of the company directors.
  • Creditors have to be informed of the sale, no later than 2 weeks following the sale. The insolvency practitioner must also inform creditors of all actions they take involving the case.
  • The new limited company must have a completely different name to that of the company which entered liquidation as per section 216 of the Insolvency Act 1986 (only the Court can make exceptions.

What are HMRC’s view of Phoenix Companies?

HMRC’s view of Phoenix Companies is that they may require a security bond for PAYE or VAT if they have been a creditor of the liquidated company.

HMRC take the view if they are a major creditor that company might have been liquidated solely to avoid tax. If this is the case, HMRC can reclaim it and apply “anti-phoenix” rules which mean they will not allow themselves to be involved in a future loss in a business starting up again.

If they believe that conditions have beeb met to suggest that they have been wound up simply to avoid income tax they can request a bond, these include:

  • Condition A: The individual receiving the distribution had at least a 5% interest in the company immediately before the winding up
  • Condition B: the company was a close company at any point in the two years ending with the start of the winding up
  • Condition C: the individual receiving the distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound up company at any time within two years from the date of the distribution
  • Condition D: it is reasonable to assume that the main purpose, or one of the main purposes of the winding up is the avoidance or reduction of a charge to Income Tax.

What are the pros and cons of a Phoenix company?

A Phoenix company brings with it lots of pros and cons, we have named a few for you to take a look at:

What are the advantages of a Phoenix Company?

The benefits of a Phoenix Company pick-up include continuity, familiarity and simplicity. Continuity means that those accustomed to buying from your old company will be able to continue doing so even though they are now purchasing through this new one instead.

  • Staff keep their jobs and contracts continue due to TUPE legislation.
  • Creditors get a high return for assets as they are needed for continuation to trade.
  • Business contracts remain in place.
  • Historic debts are written off allowing a better chance of future survival.
  • End any legal action against the company.
  • The company may be able to continue trading using a similar name to its predecessor.

What are the disadvantages of a Phoenix Company?

A Phoenix Company also beings with it a number of disadvantages these include:

  • Need to set up Bank Accounts, utilities and supplier accounts.
  • The number of finance lenders is reduced as you have no trading history.
  • A charge holders needs to grant permission for the liquidator to act.
  • HMRC may require a security bond.
  • Directors are subject to insolvency investigations.
  • Failed company record will show on Companies House.

Need Phoenix Finance

If you are thinking of placing your business into liquidation and already have finance in place, you may need the charge holders permission to liquidate, this is where the issues can start.

It’s paramount that you seek assistance in regards to your position, sometime it’s better to replace the lender pre insolvency, (Lift and Drop). Some lenders have an agreement with a number of insolvency practitioners, so your choice maybe over ridden.


In conclusion, Phoenix Company refers to a business strategy where a new company is created to take over the assets and operations of an insolvent or struggling company. While this practice is not inherently illegal in the UK, it can raise concerns regarding its ethical implications and potential abuse.

The legality of Phoenix Companies largely depends on how they are operated and the adherence to relevant laws and regulations. In recent years, the UK government has taken steps to address the misuse of Phoenix Companies and introduced stricter regulations to prevent fraudulent activities.

It is crucial for businesses and authorities to maintain a vigilant approach, ensuring that the practice of Phoenix Companies remains within the bounds of the law and that the rights of creditors, employees, and stakeholders are protected.

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Business Finance specialist at Invoice funding | + posts

Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.

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