Phoenix companies – preventing a return to the ashes

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We are all, no doubt, familiar with the phrase ‘a phoenix from the ashes’ and the concept of a new incarnation rising from the demise of a failed attempt or project. By the same token, a ‘phoenix’ company is one that is created following a formal insolvency process, such as administration or liquidation, and often involving individuals connected with the original enterprise.

Whilst this can sometimes prove successful, all too often failing companies are put through the insolvency process in order to simply dispose of its liabilities, create a new company and repeat the same failure with the same damaging consequences for creditors.

Schedule 13 of the Finance Act 2020 seeks to prevent this by enabling HMRC to serve a Joint Liability Notice (“JLN”) on individuals for money owed by a company which relates to multiple historic insolvencies or non-payments, provided that the following conditions are met:

  • At least two companies with which the individual had a ‘relevant connection’ in the previous 5-year period underwent an insolvency process and, at that time, had a tax liability of more than £10,000, with the liability amounting to more than 50% of the total value of those companies’ liabilities to their unsecured creditors. It must also be the case that the companies had failed to submit relevant paperwork or submitted incomplete paperwork, thus preventing HMRC from addressing the situation; and
  • A new company has been established with which the individual had a ‘relevant connection’ in the previous 5-year period for the purposes of pursuing the same or similar business activity as the insolvent companies.

An individual will be considered to have a relevant connection to a company that has gone through insolvency if they were a director, shadow director or a ‘participator’ in the company, as defined by section 454 of the Corporation Tax Act 2010. Basically, the latter term refers to a person having a share or interest in the capital or income of the relevant company. Any such individual must also have an identifiable connection to the new company which is relevant in the same way as with the previous company or involves their participation in its management at some level.

A JLN may be issued at any time within a two-year period following the point at which HMRC concludes that the necessary conditions have been met. The individual being issued with a notice will be held jointly and severally liable along with the new company (and any others who are issued with a JLN in relation to the case in question) for each of the following:

  • any tax liability that the new company has at the time that the notice is issued
  • any tax liability of the new company that arises in the 5-year period following the commencement of notice
  • any tax liability that the insolvent company has at the time that the notice is issued

For anyone considering buying an insolvent business and setting up a phoenix company in its place, there are a number of risks involved and points to address before taking the next step.

Firstly, it’s important to make sure that you are covered by any existing Directors’ & Officers’ Liability insurance policies and, if not, that you purchase an appropriate policy with sufficient cover. Equally, taking into account financial information regarding any tax liabilities, both current and deferred, is vital. If your relevant connection with a company should end, then you may wish to consider whether any warranty or indemnity can be obtained from that company regarding the extent of any tax liability sustained.

Given the scope of the new legislation and its ability to capture even those with minor involvement in a company, it is vital that the appropriate legal and financial advice is sought to protect the personal positions of those establishing a phoenix company. If your own circumstances apply to this situation or you are concerned that they soon will, please contact a member of our team who will be happy to assist you.