Phoenixing is one route that could make this second chance possible. It’s the process of eliminating the debt of an insolvent company through a Creditor’s Voluntary Liquidation (CVL), ultimately transferring the business and assets of the business to a new legal entity.
When carried out by a reputable licensed insolvency practitioner, phoenixing is a legitimate business rescue mechanism that allows for the continuation of a viable business that’s burdened by financial challenges.
Marco Piacquadio, Director of FTS Recovery, FA Simms and Beacon LIP
When is phoenixing an option?
Phoenixing can be an appropriate strategy in various situations where a company’s facing financial distress but has a viable business model. For example…
It has unforeseen debts and liabilities
The pandemic showed us just how quickly things can change for a business. If significant debts or liabilities have built up due to unexpected events, changes in market conditions or even surprise new competition, phoenixing can provide a fresh start.
Its operations need to evolve
Inefficient or outdated operations, excessive overhead costs or unfavourable contracts can all weigh down a company’s performance. Phoenixing could be a key part of a restructuring process.
There’s regulatory issues to solve
In industries with strict regulatory requirements, phoenixing could be used to address compliance issues. It’s possible to transfer the business to a new entity that’s already successfully operating inside the regulations and can put in place new, compliant practices.
The benefits of phoenixing
At its core, phoenixing can be the opportunity for a clean slate, allowing the director(s) to focus on growth and profitability without being weighed down by past debts. But there are other benefits too.
Because phoenixing after a CVL means the business can continue operating under a new legal entity, it provides continuity. This is invaluable when your client wants to maintain customer relationships, preserve valuable contracts and retain skilled employees.
A company’s name and reputation often hold significant value in the market, so being able to continue using an established brand-name, and the goodwill that comes with it, can help maintain relationships too. It can also retain customer loyalty and save on resources that would otherwise be needed to rebuild from scratch.
And working with us to guide your clients through phoenixing can be beneficial to you, extending the lifecycle of your client’s business and making insolvency a blip rather than the end. This not only generates immediate continuation of income but also cultivates your long-term relationship, as you become an integral part of their business operations.
Potential risks of phoenixing
Phoenixing, while a legitimate business strategy in certain circumstances, can carry significant legal and reputational risks if not executed properly and with due diligence. It’s crucial to understand and mitigate these potential pitfalls, which is why working with an experienced and trusted insolvency practitioner is essential.
Wrongful or fraudulent trading
If your client continues trading while insolvent, the director(s) could face personal liability for fraudulent trading. Directors also have a duty to minimise losses to creditors once they know or should have known the company was insolvent. This includes transferring assets from the insolvent company to the new entity for less than market value and making payments to certain creditors over others.
Repetitional impact
Phoenixing could be viewed negatively by the public, who may perceive it as a way to avoid debts or responsibilities. Creditors may also be hesitant to do business with the new company, fearing a repeat of the previous insolvency.
The role of the licensed insolvency practitioner in phoenixing
Our responsibilities extend beyond facilitating the phoenixing process. We’re legally obliged to make sure all strict legal and regulatory requirements are met, and to safeguard the interests of the company’s creditors.
When a client approaches us for guidance on phoenixing, our first port of call is to thoroughly assess the situation and advise them accordingly. We evaluate the viability of the proposed phoenix company, scrutinise the reasons behind the liquidation and confirm that there’s no fraudulent or illegal motives.
It’s also up to us to maintain transparency and disclose all relevant information to creditors, so they’re fully informed about the phoenixing process and its potential implications. Concealing or misrepresenting facts can have severe consequences.
Of course, we’re also here to advise your client on the process and the potential risks associated with phoenixing. Our guidance is designed to empower clients to make informed decisions.
Our team has handled thousands of cases, providing expert guidance and tailored solutions to companies facing financial distress. It’s our client-centric approach that has enabled us to work closely with many IFA members over the past decades.
If your client’s worried about their company’s financial situation, we can work with you and them to assess their eligibility for a CVL and carefully evaluate whether phoenixing is possible.
You can contact Marco Piacquadio, Director of FTS Recovery, FA Simms and Beacon LIP, to talk about your client’s situation by calling 01455 555 444 or emailing enquiries@fasimms.com
