Phoenix Companies and Avoiding ‘Pre-Pack’ Pitfalls

The benefit of such arrangements is that a new business may emerge from the ashes of a company having shed all of its crippling debts and liabilities… but unwary directors can find themselves falling back into the flames from which their new ‘Phoenix’ has emerged!

Under Section 216 of the Insolvency Act 1986, a director of Oldco who becomes a director of Newco commits a criminal offence if Newco uses the same, or a similar name, to that used by Oldco. The offence is punishable by a fine and/or imprisonment and the director may also be personally liable for the debts of the new company.

Without the trading name of Oldco, the agreement to buy the assets of the old company is greatly devalued. So what is a director supposed to do?

There are steps that directors in such circumstances can take to protect themselves.

1.         Serve a Rule 4.228 Notice (Insolvency Rules 1986)

This will dis-apply section 216. The notice does not have to be given before the director is appointed a director of Newco, but it must be given in the time-frame set out in Rule 4.228(3) and must be in the prescribed form.

Section 216 does not apply to companies in administration. “Pre-pack” arrangements with administrators will not be caught by section 216, but Oldco may be placed into insolvent liquidation at the end of the administration.  At that point, section 216 will kick in.

Rule 4.228(4) envisages that the notice may be given in relation to arrangements made with an administrator before Oldco is put into insolvent liquidation.

2.         Make an application to court under Rule 4.229 

This must be made within seven days of Oldco going into liquidation.

In conclusion, these are complex and confusing provisions. Getting it wrong could easily give rise to civil liability, imprisonment or a fine.

Advice must be taken early during any negotiations with an administrator or liquidator for the buy-back of the assets of Oldco.

For more information, please contact John Abbott on jca@silvermansherliker.co.uk.