What does phoenix company fraud involve?
Companies can fail for any number of reasons and there are times
when honest individuals find they can no longer trade out of their
difficulties.
After one company goes bankrupt, a second company can
start up overnight with the same directors - but with
no obligation to pay for the failed company’s losses because they
appear to be different entities.
This is a phoenix company.
It is perfectly legal to form a new company
from the remains of a failed company. Any director of a failed
company can become a director of a new company unless he or she
is:
- Subject to a disqualification order or
undertaking
- Personally adjudged bankrupt
- Subject to a bankruptcy restrictions order or
undertaking.
Fraud happens when directors abuse the phoenix company
arrangement by transferring the assets of a
failing company below their market value
before insolvency. By doing this, the fraudulent directors reduce
the funds available to creditors when the original company becomes
insolvent. As a result, the creditors are left out of pocket for
the goods or services they supplied.
How does phoenix company fraud affect creditors of a
failed company?
Once a company enters insolvency or liquidation proceedings, the
creditors will be paid in order of priority from
whatever remaining company funds are made available.
As a trade creditor, it is likely that you will receive
only a small proportion of the money you are owed.
Clearly, this may result in serious financial loss and have a
direct impact on your company’s ability to keep trading and stay
solvent.
Additionally, business confidence in your
company may suffer, your customer base might
shrink and your suppliers may impose less favourable payment terms
on you.
This will impact on your cash flow and, again,
adversely affect your company’s ability to stay solvent.
What should I do?
If you have a claim or an outstanding complaint against the
failed company, do not give up on it.
- Be persistent. You should not be put off if
the phoenix company claims the failed company’s liabilities are not
theirs when both companies appear to be the same
- Take your case to the Financial Ombudsman
Service if you are not satisfied with their answers
- Tell the Financial Services Authority (FSA)
about it. It cannot help with individual disputes between you and
the phoenix company, but the generic problem of phoenix companies
is a priority for the FSA.
Most phoenix companies are perfectly legitimate businesses. But
as with all your new customers, you should vet them
carefully first. In particular, follow up trade references
and check the directors’ credentials.
Find out why the previous company failed and
ensure the directors are not serial abusers of the phoenix company
arrangement. You can find information on company directors from
Companies House or
by obtaining a status report from a credit ratings
agency. Only extend trade credit if you are confident that you will
be paid on time.
If you are a creditor to a company undergoing insolvency, it is
essential that you help the official
receiver or insolvency
practitioner to understand the causes of failure.
They have a duty to investigate the affairs of
companies in compulsory liquidation and report evidence of criminal
offences to a prosecuting agency. If you believe that the company
is withholding information about its assets, or if you have
information about the conduct of the company, you should
contact the official receiver or insolvency practitioner
with the relevant facts.
If you suspect that an individual is acting in breach of
a disqualification or bankruptcy order, you should
report them to the Insolvency Service.
It is a criminal offence to contravene
a disqualification order or undertaking; a bankruptcy
order, a bankruptcy restrictions order or undertaking. It is also a
criminal offence for another person to assist a disqualified person
to act in this way.
Anyone who contravenes the order or undertaking could become
personally liable for any debts a company incurs
while the order or undertaking is contravened. Anybody who carries
out that person’s instructions may also be personally liable.
To find out if a director is disqualified, you can search the
disqualified directors register at Companies House.