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. In practice the office-holder will normally obtain an independent valuation and keep a clear record of how the price was reached.
Should this not be done correctly, the liquidator or administrator can ask the court to reverse a sale at an undervalue or order the buyer to pay the difference. A creditor can bring its own claim only in narrower circumstances and, while the old company is in liquidation or administration, only with the court’s permission.
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. That means a formal insolvency procedure, with a licensed insolvency practitioner as office-holder. His or her role is to oversee the process and to act in the interests of the company’s creditors as a whole, getting the best return reasonably obtainable for them.
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)
In a pre-pack administration, the administrator must send creditors a statement explaining the sale (the SIP 16 statement) with the first notice to creditors, and in any event within seven calendar days of the sale. In a liquidation, a sale to connected parties must be explained in the next report to creditors. The pre-pack statement explains and justifies the sale, including who bought, for how much, how the business was marketed and valued, and what alternatives were considered. 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 the law of England and Wales, business owners, directors and employees of insolvent companies can start a new phoenix company to carry on a similar trade, provided none of them is disqualified from acting as a director, an undischarged bankrupt or subject to a bankruptcy restrictions order (unless the court gives permission), and they observe the restriction on reusing the old company’s name set out below. 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. You can reuse the name with the court’s permission, or under one of three excepted cases in the Insolvency Rules: where you buy the business from the office-holder and give the required notice to creditors; where you apply for the court’s permission within seven business days of the liquidation, which covers you for up to six weeks or until the court decides; and where the other company has used the name for the whole 12 months before the liquidation and was not dormant in that time. 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.
Business Asset Disposal Relief and the anti-avoidance rule
HMRC has spent years closing down the practice of setting a company up for one contract, winding it up to take the cash out at capital gains rates, and starting again. The relief is now called Business Asset Disposal Relief; it was Entrepreneurs’ Relief until April 2020.
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, in section 396B of ITTOIA 2005 and introduced in 2016, is what does the closing down. It is often reported as a two-year rule, which makes it sound automatic. It is not. Four conditions all have to be met:
- you held at least 5 per cent of the company immediately before the winding up;
- the company was a close company at some point in the two years before the winding up began;
- within two years of the distribution you carry on, or are involved with, the same trade or a similar one;
- and it is reasonable to assume that a main purpose of the winding up was to avoid or reduce income tax.
The fourth condition is the one that decides most real cases, and it is a question of purpose, not of timing. Carrying on in the same line of work after a genuine winding up is not of itself caught.
Where the rule does apply, the effect is that the distribution from the winding up is taxed as an income distribution instead of a capital gain. Your gains are not wiped out; they are taxed at dividend rates, which is a worse outcome but a different one, and it is worth knowing which because the numbers and the planning follow from it.