Take care when trying to pre-pack the good parts of a floundering business.
A top Yorkshire lawyer is warning directors to tread carefully if they are considering ways to save the prospering pieces of an otherwise floundering business.
However, one of Yorkshire’s top insolvency lawyers is warning any directors who think they may find a similar way out of their own predicaments to be cautious.
With many companies in the region struggling under the harsh economic climate, some directors might be wondering if they might not be better off putting the business into liquidation, and salvaging at least the healthy party of the organisation in a new entity.
David Guest, insolvency partner at HLW McCombie Commercial Lawyers, says such phoenix companies, as they are called, have in the past few years saved hundreds of jobs and many millions of pounds of business that would otherwise be liquidated.
But Mr Guest says if you want your new business to have the same name as the old one, or even a similar one, you could run into legal problems.
“Some phoenix companies have undoubtedly been engaged in such dubious practices as going under one minute and then emerging the next, saying their unpaid debts are nothing to do with them,” says Mr Guest. “To put a stop to this, section 216 of the Insolvency Act 1986 was introduced to regulate companies with the same name as one that has only recently gone into liquidation.
“This applies if you are a director of a company that goes into ‘insolvent liquidation’ – in other words didn’t have enough assets to cover its debts – or were a director of such a company any time in the year before it went under. Starting from the day the company went into liquidation, unless you comply with the requirements set down in the Insolvency Act 1986, for the next five years personal liability for debt attaches to the director of a company with the same name, or a name that is so similar that people would think you were connected. You can’t, for example, go from running Fred Bloggs Ltd to running Fred Bloggs and Co.”
If you do want to carry on the business with its company name intact, Mr Guest says there are options you can consider – but they are limited.
“Clearly you can carry on running the business once the liquidator has sold it to you,” he says. “Someone has to keep the show going. But you still have to inform all creditors that that is what you are doing, and put an advert in the London Gazette no later than a month after the company goes under.”
If that doesn’t apply to you, your options are even more restricted.
Mr Guest added: “You have only seven days from the date of going into liquidation to apply for leave from the court to carry on being a director of the new similarly-named company.
“In deciding whether or not to give you such leave, the court will consider such things as whether you were in any way responsible for the company going into liquidation, and what risk there might be to the creditors of either the old of the new company in you carrying on.
“As you can see, it’s not an easy route to take, and, as ever, you will need good advice to support you.”
Editorial Note: Pre-packs are a legalised scam
Director of Finance regular blogger Richard Northedge slams the practice of phoenixing:
"In theory pre-packs ensure some part of the business and some jobs are retained, but in practice dozens of suppliers can be left with unpaid invoices and have to lay-off their own workforce or even go into administration themselves. The company could have been placing high orders with these suppliers to build up stock during the time they were plotting their pre-pack." See full post >>