Phoenix Companies - Illegal or not ?

[Importer]

Hello

Looking for some information relating to a company insolvency and liquidation.

If company 'A' is insolvent and enters into a Creditors Voluntary Liquidation, Is there anything in the legislation that prevents its directors from setting up a new company 'B' and then 'B' buying some or all of the assets of company A from the liquidator,and continuing to trade normally.

We've heard all about Phoenix companies rising from the ashes but is there anything actually illegal about it ?

Many thanks in advance

 

[capnhand]

Hi

No. The liquidator's task is to wind down the company in order to repay as much of the creditors as possible. If the only buyer for the assets is the former directors of the company then this is quite legitimate.

The liquidator is required to give a report to the ODCE under S56 of the Company Law Enforcement Act 2001 on how the actions of the director contributed to the failure of the company.The ODCE may apply for the directors to be disqualified as a director for a period through the courts.


capnhand

 

[Importer]

Many thanks

........and what if there are two or more interested parties in the business. One party is the previous directors / shareholders.The other party is completely disconnected

Is there a pecking order ?. Will a disconnected party be a preferential buyer or is it just a matter of who has deeper pockets to offer the Liquidator.

Is it really the case that a company can be entered into the liquidation process and bought back by the previous directors of the business if their offer is highest ?

I know this is not allowed in UK but I suppose here in Ireland anything is possible.

 

[Woodie]

The job of the liquidator is to gain the best possible return for creditors of the liquidated company. It can mean existing directors or someone unconnected, I don;t think that there is pecking order per say.
As capinhand has stated there is also an obligation on the liquidator to ensure that the existing directors did nothing to contribute to the failure of the company.

I am not so sure what you say about the UK is strictly true. If company A fails and there is no improper behaviour on the part of the directors then there is nothing to stop the same directors starting company B and trying to do it right the second time. It is more than likely that people involved in a specific type of business will use their "skill set" to do something similar in the future. How many companies have been bankrupt or on the brink and have been revitalized or started afresh and gone on to success, some of the biggest names in industry I would say.

 

[Importer]

Thanks for your input. Very helpful. The following is the situation in the UK. There are some "get out of jail" cards which are not mentioned.

Essentially insolvency legislation prohibits any person who has been a director or shadow director of a company at any time for a period of 12 months preceding that company entering liquidation from carrying out the following for a period of 5 years following liquidation:
* Be a director of a company that operates with a similar name or trading style (so close to infer an association with the liquidated company);
* Be involved in any way (whether that be directly or indirectly) in the promotion, formation or management of another company with a similar name or trading style;
* Be involved in any business which trades in a similar trading style as the company which entered liquidation.
Breaching this legislation is a criminal offence and therefore leaves the person(s) involved liable to imprisonment and/or a fine, and possible disqualification from being a director in the future. Also, should the subsequent company or business fail leaving a shortfall to its creditors, then the person(s) involved may also be made personally liable for the shortfall to creditors.

 

[Woodie]

Thanks for your input. Very helpful. The following is the situation in the UK. There are some "get out of jail" cards which are not mentioned.

Essentially insolvency legislation prohibits any person who has been a director or shadow director of a company at any time for a period of 12 months preceding that company entering liquidation from carrying out the following for a period of 5 years following liquidation:
* Be a director of a company that operates with a similar name or trading style (so close to infer an association with the liquidated company);
* Be involved in any way (whether that be directly or indirectly) in the promotion, formation or management of another company with a similar name or trading style;
* Be involved in any business which trades in a similar trading style as the company which entered liquidation.
Breaching this legislation is a criminal offence and therefore leaves the person(s) involved liable to imprisonment and/or a fine, and possible disqualification from being a director in the future. Also, should the subsequent company or business fail leaving a shortfall to its creditors, then the person(s) involved may also be made personally liable for the shortfall to creditors.

I see where you are coming from. The legislation as I understand it excludes directors of an existing enterprise from setting up a company which effectively looks like it is same company, that is without the specific permission of the court. The more likely appropriate mechanism would probably be an administration order if they directors wanted to continued the business in a restructured manner.
So back to your original statement, I still think that the liquidator could choose to sell to existing directors but the court may take a dim view of that course of action.
There are instances for example where a company could enter into an agreement (such as has been the case for tenancy agreements in Ireland in the past decade) that could bring down the company in the current climate.
So I read the law as excluding passing off as the same company but I don't see where it excludes people form being involved in the same type of business . That case would be an implied guilt of all directors regardless of circumstances and effectively exclude them from making a living.