Insolvency law not protecting creditors ‘burnt’ by phoenix companies

A recent insolvency survey among SMEs by leading commercial debt recovery company Daniels Silverman has found that a massive 96% of businesses believe that insolvent companies should not be allowed to escape debts by transferring assets to a new company, operating under the same directors and in a similar guise, under pre-pack administration  known as […]

A recent insolvency survey among SMEs by leading commercial debt recovery company Daniels Silverman has found that a massive 96% of businesses believe that insolvent companies should not be allowed to escape debts by transferring assets to a new company, operating under the same directors and in a similar guise, under pre-pack administration  known as phoenix companies.

  • 96% disapprove of ‘phoenix’ companies
  • 80% have written off debt as a result of company failure

Daniels Silverman’s research generated over 350 responses from SMEs and revealed that 80% have written off debt as a result of company failure. Financial losses varied, with 57% writing off up to £10,000, 20% lost between £10,000 and £25,000 and 23% more than £25,000.

Carole Hughes, managing director, Daniels Silverman, says:

“Our survey results indicate that many SMEs would like a rethink in insolvency law to protect companies from unscrupulous directors that take advantage of pre-pack administration. They have told us they are becoming more and more frustrated by directors avoiding their debts by going through a pre-pack administration to form a new company from the remains of a failed company.

“It is very hard for a creditor to see an insolvent company trading “as usual” often from the same premises, under the same director and with the same offering, while they are left significantly out of pocket because the money owing to them has been written off.

“While there are legitimate reasons for many pre-pack administrations we would call for a look at the number of unscrupulous directors who are exploiting this process to avoid paying their debts and profit from pre-pack administrations. A change in the law is needed to prevent those directors whose businesses repeatedly fail from resurrecting similar businesses and abusing pre-pack administration law.”

Gary Lee, partner at business rescue, recovery and restructuring specialist, Begbies Traynor, adds:

“We have seen a huge increase in the number of pre-pack administrations; however, the resurrection of a business in a new corporate shell is not always necessarily in the best interests of creditors and the general economy. Insolvency practitioners should explore all options available before concluding that a sale back to the existing directors represents the best outcome and it should be the result of a process of elimination of all other possible options rather than the default option of choice.”