Phoenix companies are controversial and as a result, there are strict rules in place governing the process of starting a new phoenix company via the purchase of the previous business out of an insolvency procedure by connected parties.
Where the buyer is a connected person, the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 apply to a substantial disposal in the first eight weeks of an administration. The administrator cannot proceed without either the approval of creditors or a qualifying report from an independent evaluator. The older test of simply demonstrating that the sale maximises returns no longer describes the regime on its own.
This article will give an overview to what phoenix companies are, and the various rules and regulations around them.
What is a Phoenix Company?
A Phoenix Company is a new company set up from the ashes of one that has become insolvent.
It is usually set up by the same directors, and with the same assets, including intellectual property. There is a lot of legislation around it so that unscrupulous directors cannot simply write off the debt from one insolvent company, and then start afresh without consequences.
What are the Rules Around Starting Phoenix Companies?
The main points with setting up phoenix companies is that any assets purchased should be done so at fair value. This means they must be independently valued and transparent record keeping maintained.
Should this not be done correctly, it is not unheard of for creditors to challenge phoenix companies in open court for assets sold at undervalue.
The other key factor is that a Phoenix company can only rise from the ashes of the old company, if the previous company is truly dead. The only person who can determine this is a licensed IP. His or her role is to oversee the process and to put creditor interests at the forefront of his or her actions to recoup as much money as possible for unsecured creditors.
Are Phoenix Companies Legal?
Where due process is followed, phoenix companies are perfectly legal.
For some people the term does still carry a negative connotation, however, since before the government tightened up its laws in this area the practice of ‘phoenixing’ was used unscrupulously by some directors.
The Role of the Insolvency Practitioner (IP)
The IP must notify creditors of the sale of the business as soon as possible, but no later than 14 days after the sale date. The office-holder is also required to disclose all actions and decisions within a statement sent to creditors, which is usually sent out at the same time as the notification of the sale. Additionally, the office-holder investigates the directors’ conduct in the period before the insolvency. There is no single look-back period: different claims carry different statutory windows, and transactions with connected persons can be reviewed over a longer period than those with unconnected parties.
The IP is also tasked with selling the company’s assets at the best possible price. A business asset sale aims to avoid subsequent allegations that the directors were able to start out again debt free. As the business is distressed and a quick sale is needed, business asset prices may be discounted. It is crucial that the sale of the previous business is viewed as a legitimate sale as some transactions have been successfully challenged in court by creditors.
Purchasing a Phoenix Company via a Pre-Pack Sale
Under UK law, business owners, directors and employees of insolvent companies can start a new phoenix company to carry on a similar trade as long as the people involved aren’t personally bankrupt or disqualified from managing a company. That said, starting a phoenix company isn’t straightforward and when a company goes into liquidation or is wound up, there are strict rules to follow that protect the interests of unsecured creditors and prevent company directors from reneging on their obligations. These rules include the following:
- When the directors and/or shareholders make the purchase, they may need to use personal funds, such as savings to buy the company if no other external investment is available
- If the new company needs to focus its operations, frequently, not all of the assets of the old company are purchased. Directors may not be able to afford to buy all of the assets at the same time and a deferred sale and purchase agreement may be negotiated
- If employee contracts are transferred to the new company, TUPE regulations come into play and the new company may need to seek professional advice before going down this route
- If the previous company has HMRC PAYE or VAT arrears, it is highly likely that the taxman will demand deposits from the Phoenix company to mitigate risk.
- Section 216 of the Insolvency Act 1986 restricts a director of a company that went into insolvent liquidation from being involved, for five years, with a company using a name by which the old company was known, or one so similar as to suggest an association. Breach is a criminal offence and can bring personal liability for the new company’s debts. It is a restriction, not an absolute bar: there are three statutory excepted cases, broadly where proper notice is given to creditors on a purchase of the business from the office-holder, where the court gives leave, and where the name has already been used by an established company for the required period. Take advice before reusing a name, because the notice route is time-limited and easy to get wrong.
Under these stringent rules, it is possible for directors to wind up a company and start the same business again, retaining the most profitable parts of the business and offering some continuity for suppliers and employees.
Entrepreneurs Relief
In recent years HMRC has made a special effort to clamp down on directors who set up companies for the duration of a specific contract then shut it down to try to claim Entrepreneurs Relief.
The attraction was taking profits out of a cash-rich company at capital gains rates rather than dividend income rates. The figures have moved: Business Asset Disposal Relief, formerly Entrepreneurs’ Relief, gives 18% on qualifying gains for disposals from 6 April 2026, against dividend rates of 10.75, 35.75 and 39.35 percent for 2026/27. The gap is narrower than it was, and the Targeted Anti-Avoidance Rule can remove the capital treatment altogether where a company is wound up and a similar trade continues.
The Targeted Anti-Avoidance Rule or TAAR set up in 2016 are designed to counter exactly this. By setting up a similar company within two years of the sale, these rules mean your gains will be wiped out.