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Phoenix and Turnaround Finance

A company is referred to as a "Pheonix" when a new business commences from the failure of a previous business. It is usually run by the same management and has a similar name to the business that failed.

Pheonix companies have had a bad reputation for some time. Prior to the Insolvency Bill of1986, some directors deliberately ran companies into the ground, only to buy the assets back from a “tame” liquidator, leaving the creditors high and dry.

The Enterprise Bill, which has recently been passed by the Government, seeks to promote entrepreneurship and enterprise, and it provides support to the company owners of failed business ventures. This new “rescue culture” provides the chance for businesses to start over again and enables the profitable elements of the failed business to survive, thereby offering some continuity for both suppliers and employees.

It is not illegal to start up a phoenix company following the liquidation of the original company, But there are rules to be followed to ensure that the phoenix company is properly set up and operated.

The rules are designed to deal with the abuse of directors deliberately running a company into insolvent liquidation, leaving unpaid creditors, only to set up a new similar business trading under a similar name to that of the liquidated company. The restriction applies to anyone who was a director or shadow director of a company in the twelve months ending with the day before it went into insolvent liquidation.

Restrictions on use of Company Name

A phoenix company may not use any name by which the liquidating company was known in the last 12 months or a name which is so similar that it suggests an association with the liquidated company.

Unless – There is an arrangement with the Liquidator to acquire substantially the whole of the business of the insolvent company oe the new company with the similar name has been known as such for 12 months prior to the creditors meeting of the liquidated company and has not been dormant.

A legitimate sale of the assets

A professional valuation is the key to having a legitimate sale of assets from one company to another. Aside from the obvious tangible assets, consideration must also be given to the value of intellectual property and the value of goodwill. Although these are not easily valued, they must be given careful consideration before any transaction takes place.

The physical assets of the company can be valued on three bases:-

  • Forced sale - one which estimates the expected realisation of the assets if there were to be an auction.
  • Open Market- the expected realisable value for the assets if they did not have to be sold quickly and instead time was available to test the market for the best price.
  • Value to the business

If a director of the old company wishes to sell the assets to a phoenix company it must be at the higher of the above valuations.

Pre Pack’s

With proper advice in many instances it is possible to have such a pre-packaged sale even prior to the liquidation creditors meeting thus safeguarding jobs, your future and indeed maximising returns to creditors.

A pre-packaged sale (or pre pack as they are usually referred to) is a process wherby the old company is placed into administrative receivership and a phoenix company acquires the assets, goodwill and trade for a value that is acceptable to the administrative receiver. Prior to the appointment of the receiver, funding for the new company is sourced, so that the business can be acquired with the minimum of delay.

At Non Status Solutions we frequently arrange pre pack’s on behalf of our clients, where it is evident a refinance is not commercially viable in the “old company”.
Our staff are experienced in most areas of business turnaround, corporate finance and fund raising.

We are not insolvency practitioners! as such our motivation is “rescue” rather than “burial” however as part of the pre pack process do we work in conjunction with a small number of “commercially aware” insolvency practitioners to achieve the most desirable outcome for our clients.

Our role in arranging pre packs is pivotal, and will include:

  • Advising the troubled company of the options available
  • Preparation of financial models to ensure that the Pheonix is a viable proposition
  • Introduction to an appropriate insolvency practitioner
  • Formation of the new phoenix company (if required)
  • Negotiating an acquisition price with the insolvency practitioner
  • Sourcing funding for the phoenix company

We call upon the resources of our Commercial Finance Brokerage, to source funders who are sympathetic to the Pre Pack concept. If the current funder is unlikely to approve our preferred receiver (many banks only use the larger insolvency practitioners), we may well introduce a funder to the old company to “take out” the incumbent finance provider.

Our new funder (as debenture holder) is then free to appoint any insolvency practitioner they wish. They will also fund the prepack arrangement, under this scenario it gives the funder more confidence in the proposal as they can see both sides of the deal.

Crown Preference

On the 15th September 2003 the rights of crown creditors to claim unpaid VAT and unpaid PAYE with "preferential" priority was abolished. There is now a different order of priority as to "who gets what" in any insolvency process.

Debenture holders (usually the bank) now rank ahead of unsecured creditors (these now include PAYE and VAT) . So if you have personally guaranteed your company bank liability this could be good news, as any purchase of the assets by the phoenix company will be used to reduce the bank debt in the 1st instance and thereby reduce the amount of debt that you will have to settle personally with the bank.

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