It's not uncommon for companies to go into administration, then reappear a short time later with the same name and livery. We explore the risks and liabilities for managers and directors involved with these 'phoenix companies'.
The road haulage and logistics sector, as with many other market sectors, has been affected by challenging market conditions. This coupled with strict enforcement of operating licence and financial standing regulations, has put many businesses under strain.
“Phoenix companies rising from the ashes” and “pre-pack administrations” are phrases which are regularly bandied in the news with reports of haulage businesses going bust, only to reappear straight away using the same name and livery on trucks and trailers. From the outside it would appear that the operators have carried on their business as usual, whilst the creditors are left out in the cold.
There are arguments for and against pre-pack administrations and this article does not intend to discuss their merits (or otherwise).
Basic pre-pack administration process and example
The basic premise of a pre-pack administration seems fairly straightforward and an obvious choice for the directors of a company:
- A struggling company (OldCo) files for administration
- The directors of OldCo form a new company (NewCo) with the intention of buying OldCo out of administration, maybe for a steal
- Often NewCo has a very similar company or trading name to OldCo
- The result of which is that the customers/creditors of OldCo may be completely unaware of the fact that OldCo has gone into administration or latterly liquidation and that they are now dealing with NewCo
The significance of the new company name in relation to director/management liability
Where a NewCo uses a name which is the same or similar to that of a name used by OldCo, under Insolvency Law a director (or person involved in the management or promotion of NewCo) could be held to be liable for the debts of NewCo and a director could be further liable to a fine or imprisonment (or both).
In a pre-pack scenario, once OldCo has gone into administration and the business and assets are sold on more often than not OldCo goes into liquidation within 12 months of it going into administration. The Insolvency Act 1986 ("Act") prohibits a person from being a director or a shadow director of a NewCo with the same name, or a name so similar as to suggest association with the OldCo, within five years of OldCo going into liquidation.
The definition of “name” under the section includes any trading name of the OldCo. If a person contravenes this section then they are liable (on what is called a “strict liability” basis i.e. it doesn’t matter whether they were aware of the breach or not) to imprisonment or a fine (or both). Additionally any former director of OldCo who is involved in the management of a NewCo, which uses a prohibited name,) is personally liable for all of the debts of the NewCo.
|Take a simple example: A haulage business (OldCo) with financial difficulties loses its operator’s licence and agrees to sell its business to a competitor. The competitor then changes its trading name to that of the business that it has just bought, and the shell of the OldCo goes into liquidation. From that point onward, any directors of OldCo that transferred with the business to the competitor will be committing a criminal offence - and will be personally liable for all of the trading debts of that company|
There are a number of exemptions to the rules about strict criminal and personal liability, but they can involve either sending formal notice OldCo’s creditors informing them of the facts or may even necessitate an application to court
Pre-pack administrations can seem to be an ideal way to rescue a failing business, but they are not without their issues and can be an expensive trap for unwary directors and managers. We advise those involved with the management of a pre-pack or phoenix company to give due consideration to the potential criminal and other liabilities which may arise.
If you have any questions or would like any further information, please contact Gavin Jones.
Author: Amy Crighton and Gavin JonesThis information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.