Forget the phoenixing contractors; a bird in the hand is worth two in the bush

It is no surprise to us, on the front lines of private limited company openings and closures, that “Phoenixing” was at the center of the National Audit Office’s investigation into HMRC. this month.

Not because the mythical bird based on the term is increasing cyclically, but because this peak of insolvencies anticipated by the BoE will – unfortunately – provide fertile conditions for phoenix companies, writes Gareth Wilcox, partner at Restructuring and Insolvency Opus.

Update: What is “Phoenixing”?

The phoenix is ​​the practice of shutting down one limited liability company that is in debt (either by liquidation or by dissolution), and another taking its place, generally operating using the same assets and / or business model – as if it were going up. or reborn like a phoenix from the flames. Yet crucially, this transition is made with the underhand intention of avoiding debt, or leaving behind the debts accumulated in the initial and previous company.

What’s wrong with the Phoenix?

Insolvency law exists to allow directors of companies burdened with unmanageable debt to come out of bankruptcy and start a new business.

This is not an example of the legislature being of course of course; instead, the government wants companies to put money into the treasury once again.

The problem is; this can be open to abuse and for the creditors (especially HMRC as the creditor in almost all of these scenarios) they find themselves “carrying the box”, financially, for the rogue administrators. Although there is no prohibition on an individual being a director of other companies while another is the subject of insolvency proceedings, the practice of “phoenix” is something that HMRC holds. to repress.

With the possibility of an increase in business bankruptcies on the horizon in the wake of the Covid-19 pandemic, and the Chancellor facing the expected burden of paying under government-backed support measures, it is clear why this issue is now receiving renewed attention.

In fact, as mentioned at the outset, the NAO chose Phoenix Corporations as one of two taxpayer populations to examine, in order to determine how well the HMRC understands how the pandemic will affect the amount of work that tax officials have to do. do to manage debt. See the full NAO report here, but in short, the NAO said: “In both cases, we found that HMRC had a limited understanding of the impact of the pandemic on the scale of what HMRC should do.”

What can the HMRC do against the Phoenix companies?

One of the more serious penalties available to HMRC is that it has the power to issue a personal liability notice to a director, which results in the individual becoming personally liable for certain tax obligations of the ‘business.

A personal liability notice may be issued by HMRC if it considers that an officer of the company has caused underpayment of dues through fraud or negligence.

Such a PLN can arise when a company has failed to pay its taxes on time and when HMRC is of the opinion that the non-payment of the tax debt was due to severe levels of negligence or fraud. Often times, this can include phoenix companies with a history of non-payment of taxes.

This is clearly a huge disruption to the concept of ‘limited liability’ (the primary reason entrepreneurs organize themselves), and HMRC will generally only seek to rely on these powers when there is demonstrable evidence that steps have been taken to deliberately avoid paying taxes.

A slightly less drastic option, but one that entrepreneurs should be wary of nonetheless, is that HMRC can demand a guarantee payment (or surety) from a successor company following a default, in order to avoid collapse. risk that a new bad debt will be incurred.

Either of these measures can be challenged. And neither is likely to happen if relatively low debt is suffered by HMRC as a “first offense.” But there are also potential criminal consequences for tax evasion, of course.

Are there any other consequences for phoenix business leaders?

In addition, proof of “Phoenixing” is an issue that is taken into account when considering disqualification proceedings against directors.

Likewise, any appointed insolvency practitioner is required to include such evidence when reporting on the conduct of directors in connection with their appointment. As such, it is possible that such conduct could lead to the disqualification of a director from acting as a director.

In addition, a director who reuses a similar corporate name may find himself personally liable for the debts of the successor company.

Will HMRC have the resources to investigate?

This is a question that seems to come up repeatedly, with an upsurge in bankruptcies expected to strain the resources of an already stretched HMRC and associated government departments.

However, the HMRC having recently announcement how it intends to tackle the misuse of covid support measures, and given that the tax office has set up specific teams to investigate the matter, it is clear that this is something the government has intend to focus.

Combining HMRC’s intention above with the seriousness of the consequences for breaking the law, I would certainly not suggest that an administrator takes the risk. It should be borne in mind that (assuming collections are made) these departments will be self-funded and are designed to hand money back to the treasury, and at a time when they are really needed.

Final thoughts

As always, the entrepreneurs of the limited company in financial difficulty will have every interest in seeking advice from suitably qualified professionals, such as their accountant, an insolvency practitioner or a lawyer.

Taking reliable and appropriate advice will ensure that the difficulties are handled correctly, minimizing the risk of criticism, or worse – the consequences, for the director concerned. This may, in appropriate circumstances, include the director (or other company) purchasing the assets and / or operations of an insolvent company (for an appropriate value). However, this should only be done with the supervision of a licensed insolvency practitioner.

All in all, one of the very last things I would recommend for entrepreneurs is to start a new business to trade and give up the old one. With the phoenix, the old adage rings true that a bird in one hand is absolutely worth two in the bush. And well beyond this “in the new, getting out of the old and indebted approach” of the constitution of a company being a blatant disregard of the duties of a director towards the previous company and its creditors, the consequences can be serious and are only likely to get worse over time.

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