Insolvency Service to crack down on rogue directors involved in ‘phoenixing’

A phoenix company, as the name implies, refers to a phoenix rising from the ashes.

It describes a business that has been purchased out of a formal insolvency process, such as administration or liquidation, often by the existing directors seeking to avoid paying debts and tax liabilities.

Now HM Revenue & Customs (HMRC) has given the Insolvency Service the power to investigate directors who were suspected of the practice.

The Insolvency Service already had powers to investigate directors of companies that enter a form of insolvency, including administration and liquidation. 

The new powers complement the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, designed to tackle directors who have dissolved their companies to avoid repaying government-backed loans, such as the Bounce Back Loan Scheme.

These powers have been extended to enable live companies to be investigated where there is evidence of wrongdoing.  If misconduct is found, directors can face sanctions including being disqualified as a company director for up to 15 years or, in the most serious of cases, prosecution.

It should go some way towards dealing with “phoenixism” where directors of dissolved companies set up a near-identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HMRC, unpaid. 

These powers also focus on rogue directors seeking to avoid paying back their debts, including Government loans provided to support businesses and save jobs during the COVID-19 pandemic.

The Business Secretary, Kwasi Kwarteng, said: “The Government is committed to tackling those who seek to leave the British taxpayer out of pocket by abusing the COVID-19 financial support that has been so vital to businesses.”

For many companies dealing with problems in a legitimate way, and have debts that they cannot pay, the directors may wish to enter into a Creditors’ Voluntary Liquidation (CVL) and your financial adviser will be able to help.

For expert advice on related matters, contact our experts today.