The Ethics Of The Phoenix

I’m seen an increase in the number of phoenix companies in the UK. A phoenix company is when a business closes down one day and then opens the next day as a completely new company but with the same staff, directors and customers.

You can usually tell this has happened by a slight change of name, a different bank account, and the directors looking exhausted but relieved. Businesses usually phoenix (if we can use it as a verb) because they are in trouble and have big debts around their shoulders.

When is phoenixing a company ethical?

Ethically, the difference seems to be that some businesses phoenix because they would not survive otherwise with their huge debts to the banks and some businesses phoenix in order to avoid paying their suppliers.

You can tell the difference because the second category (the unethical ones) phoenix again and again. They’re the ones where the directors have taken all the money out of the business before closing it down – you can recognise them when the director is driving a Lexus but telling you that they can’t afford to pay your invoice.

In essence, creating a phoenix company is fairly simple. You put one company into liquidation and open a new company at the same time. The new company now does whatever the old one used to do for the same customers, with the same staff and a very similar name and brand. Quite often, you don’t notice the difference – you could be sitting next to a phoenix right now.

Pros and cons of phoenixing your company

If you’re thinking that this might be a great way to ditch some of the hassles of business life, such as that troublesome loan which the bank seems to think you will pay back, or that useless member of staff, then do think carefully. A phoenix strategy has some things going for it, but there are also some serious disadvantages.

A phoenix has to be done properly and legally; otherwise, you’ll end up still owing the money, but you won’t be able to pay it back because you’ll be in prison for fraud. Get the right advice, from an accountant who has done this before (many accountants haven’t) or preferably an insolvency specialist.
Phoenixing has major long-term consequences. You could have that bird around your neck for the rest of your life. If you put a company into liquidation, you are less likely to get a loan in the near future, and you’ll have difficulty getting personal credit, even for small items. Some people who have been through this have had difficulty opening bank accounts or setting up online payments, even years after the event.

When I found myself next to a phoenix director

I was on the board of a local not-for-profit organisation, along with a few other people. The organisation needed to set up a new bank account. We all had to sign some forms to be given to the bank, all completely normal business type activities.

A few weeks later, the bank refused to open an account. They mentioned one of the board members as the reason why. Let’s call him Sam. Sam looked very embarrassed and puzzled. He told us that he’d been involved in a company which had gone into liquidation and then phoenixed. He hadn’t been involved for very long, and all of this was four years ago. But the bank still didn’t want him as a customer.

We ended up keeping him on the board, but not as a full director, so he didn’t have a vote. Once we’d filled out the Companies House forms to remove him as a director, we sent off a new batch of forms to a different bank, which was happy to take our business.

This set us back by about three months and gave us extra hassle and forms to fill out, but didn’t have serious consequences for anyone. However, it might have done. If you are the sole director of the new company and know that you intend to borrow money in the future, either for a business or for yourself, for example, take out a mortgage, think carefully about whether this is the right direction for you.

If you want to keep the company going in its new phoenix form, you may not feel that you have a choice.

When you might have to

I’ve worked with three businesses in the last year who have phoenixed. They all tried everything they could to keep the original business going, but when the banks withdrew credit, the directors had no choice. The only alternative was to close down the business for good, make everyone redundant with no severance pay and walk away. The phoenix was the lesser of two evils.

When a phoenix is unethical

An unethical phoenix, like most bad actions, has a malicious motivation.

When a business owner phoenixes their company because they have been reckless or greedy, paying themselves big wages when the company isn’t paying suppliers, spending money on lazy, crazy marketing activities such as PR to promote the owners’ egos rather than sell products or buying expensive company cars, they may phoenix the company.

In one case I saw, the business owners had bought a giant fish tank for the office although sales were drying up.

Although we might criticise someone for what looks like ostentatious spending, I don’t necessarily see this kind of phoenix as unethical. Maybe stupid…but we’ve all made business mistakes.

Sometimes, the need to phoenix the company is a strong wake-up call for an overly enthusiastic Tigger type entrepreneur. I’ve worked with people who have learnt some strong lessons from their experience of phoenxing a company. They’ve moved on and are grateful that the liquidation and phoenixing saved their business.

Some people will phoenix a business to get out of paying money they owe, and try to keep the assets of the company for themselves. The classic unethical phoenix is where the company’s assets get sold to the owner’s mum for a fiver at liquidation, and you see Mr Dodgy driving his (sorry, his mum’s) sleazemobile a week later. And, I have very little sympathy for entrepreneurs who phoenix their company to avoid paying redundancy or back wages to staff.

How you can make a better phoenix

If you’re in a bad situation and are thinking about phoenixing, or you’ve done it and are feeling morally icky about it, there are some things you can do to make it better. Firstly, protect the little guys. If you owe your suppliers and can’t pay them, unless you talk to them, they will hate you. Make sure you know that the small companies you owe money to know that they’ll get their money later, and make sure that you stick to this.

Helen’s story

Helen’s company had got into trouble and she could no longer afford to pay back the large bank loan she’d taken out and spent on some marketing that hadn’t worked. I advised her to phoenix to get rid of the loan. She put her company into liquidation. The next day, she set up a new company, which re-employed all her staff on the same terms and conditions. We’d worked out a plan to make the new company viable and it survived for another 5 years.

Unfortunately, my company was one of the creditors of Helen’s company, so I had to write off 4.5k of fees. Two years later, Helen rang me and asked me to send her an invoice for 4.5k, which she paid that day. I respect her for taking the trouble to do this, and I enjoyed that 4.5k.

Quick note – this is about a phoenix company in the UK

This article talks about phoenix companies in the UK. In the UK, phoenixing is perfectly legal as long as you follow the rules. Other countries have different laws.

And even if you’re thinking about a phoenix company in the UK, it’s only legal to do this here if you follow the rules. If you decide to go down this route, do get yourself a good insolvency practitioner to keep you on the right side of the law, even if you feel that your phoenix is 100% ethical, the UK legal system may see it differently if you don’t follow the rules.