Government to crack down on phoenix companies

Phoenix companies get their name from the mythical bird that rises from the ashes; it is a business that restarts after all or part of the assets of a business have been brought out of an insolvency process such as a liquidation or administration.

The role of the Insolvency Service with these firms has been highlighted in the press in recent times, in the aftermath of several high-profile collapses in the corporate world (like Carillion). There is pressure to change the current legislation so directors can be held responsible for their actions after the company has been sold.

One criticism of phoenix companies is that directors have often been accused of dissolving businesses to avoid having to pay for employees and their pensions. Under the new proposed government plans, however, they could face fines or even be disqualified from going on to run a new business should it be proved they have behaved improperly. They will also be required to outline how the firm can afford to pay dividends alongside financial commitments.

The legislation will seek to stop companies paying dividends to shareholders when they are liabilities outstanding and it aims to address the situation where suppliers are left unpaid while share holders are still receiving dividends.   The government has asked the Investment Association to monitor dividend payments as part of the review.

The legislation is set to be explained in further detail in the autumn. It is being put forward as part of the government’s response to the corporate governance and insolvency consultation that was launched this past March.

As with any new measures in the field, the licensed insolvency practitioners at Walsh Taylor will naturally be monitoring the situation as matters progress.

For details on our business support services, please call us on 03300 244 660.