Govt to crackdown on phoenixed firms

Govt to crackdown on phoenixed firms

The Government will give new powers to the Insolvency Service to crack down on reckless directors who phoenix their firms.

The Department for Business, Energy & Industrial Strategy (BEIS) has unveiled a series of new measures on corporate governance and insolvency which include new powers for the Insolvency Service to investigate directors of dissolved companies where they are suspected of having acted in breach of their legal obligations.

Under the new powers, which will be set out in further detail in the autumn, the Insolvency Service will be able to fine directors or even have them disqualified.

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The government said the new rules respond to the many calls for the government to act against the practice of phoenixing, which is often used to avoid liabilities.

Business minister Kelly Tolhurst said: "The UK is a great place to do business with some of the highest standards of corporate governance.

"While the vast majority of UK companies are run responsibly, some recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies. This can’t continue."

The new rules will also mean that directors who have dissolved companies to avoid paying workers or pensions could also be penalised.

Phoenixing - where an old firm is declared insolvent or closed down by the owner, only for them to set up another business with a new name - is not illegal because it would prevent entrepreneurs unable to continue in their old firms from paying off their debts, closing down and then trying again later on. 

But the Financial Conduct Authority (FCA) has taken a dim view of advisers phoenixing when the owners shut down their old firm thinking they can escape their debts or from bad advice they know is on their books, and then transferring their client book into a new firm and carrying on as before in a new name.

In May this year, the FCA and the Insolvency Service reached a deal to share information to cut down on the number of phoenix companies operating in the UK.

FTAdviser reported earlier this month that fears over regulatory risk involved with defined benefit (DB) transfers and a lack of professional indemnity cover have pushed financial advice firms to consider phoenixing.

On corporate governance, the government is "further raising standards" by ensuring bosses explain to shareholders how the company can afford to pay dividends alongside financial commitments such as capital investments, workers’ rewards and pension schemes.

Carillion, which went into liquidation in January and had the majority of its 13 DB pension schemes entering into assessment at the Pension Protection Fund (PPF), was one of the recent cases which showed how a company continued to pay dividends while ignoring its pension commitments.

The government will also introduce new measures in response to its corporate insolvency consultation, which "will give financially-viable companies more time to rescue their business".