More scrutiny around phoenixing won’t prevent bad deals, say lawyers
16 March 2015
Greater scrutiny around the practice of ‘phoenixing’ will not prevent bad deals for creditors, employment lawyers say.
Mon, 16 March 2015
Greater scrutiny around the practice of ‘phoenixing’ will not prevent bad deals for creditors, employment lawyers say.
Last summer, Secretary of State for Business Innovation and Skills Vince Cable commissioned a report as part of the government’s wider ‘Transparency and Trust’ agenda.
The aim of the report was to increase transparency in pre-packs arrangements or ‘phoenixing’, where company directors walk away from company debts by liquidating the company, only to set up another company shortly afterwards, invariably with the same directors in charge.
Recruiters have gained a reputation for entering into such arrangements when faced with situations such as tax liabilities, leases they wish to exit and other circumstances in which it is seen as more financially beneficial to ‘do a phoenix’ than continue their current business as is.
The report, from Teresa Graham, an expert in better regulation, recommended creditor and insolvency organisations should develop a process to independently scrutinise such deals.
In a statement released last week [13 March], the government announced a steering group made up of such organisations has taken forward her recommendation in the form of a pool of independent business people. It is expected to start scrutinising these deals from this summer.
Graham’s report followed new false employment legislation, introduced in spring 2014, that recruitment industry figures said could tackle phoenixing by making directors of recruitment companies personally liable for unpaid tax and National Insurance of workers.
The recent government statement adds that at the same time, a new statement of insolvency practice (SIP16) will come into force, requiring insolvency practitioners to disclose to creditors additional information about pre-pack sales, particularly on the marketing and valuation of businesses.
But Glenn Flannery, partner at commercial law firm Nabarro, told Recruiter he did not think these moves would create “any great shakes” for the recruitment industry.
“It’s possible we might have a few less pre-packs as a result of the reforms and a few less bad ones. I think the market for pre-packs is not going to disappear.
“I think it is going to be largely business as usual,” he added.
However, according to Tom Astle, a partner at global legal firm Hogan Lovells, the reforms will make the process of phoenixing harder: “It won’t guarantee that the phoenix scenario will never happen but it will make it harder by improving transparency.
“It is still the case that if your business goes bust and you call in an administrator to look after it, the administrator’s job is to sell the business at the best price that he thinks is obtainable; and ultimately if the best offer on the table to buy the business back is from the people who used to own it, he will still do that transaction.”
He added: “The difference is now it has to be a lot more transparent about the other options he considered and what he did about it.”
Pav Reddy, partner at business law specialists Charles Russell Speechly, agrees, adding: “It won’t stop it but it is showing to creditors that there’s some determination of whether this is in the best interests of the creditors as a whole by allowing the company to survive and to ensure the management have paid the right price for it.”
Last summer, Secretary of State for Business Innovation and Skills Vince Cable commissioned a report as part of the government’s wider ‘Transparency and Trust’ agenda.
The aim of the report was to increase transparency in pre-packs arrangements or ‘phoenixing’, where company directors walk away from company debts by liquidating the company, only to set up another company shortly afterwards, invariably with the same directors in charge.
Recruiters have gained a reputation for entering into such arrangements when faced with situations such as tax liabilities, leases they wish to exit and other circumstances in which it is seen as more financially beneficial to ‘do a phoenix’ than continue their current business as is.
The report, from Teresa Graham, an expert in better regulation, recommended creditor and insolvency organisations should develop a process to independently scrutinise such deals.
In a statement released last week [13 March], the government announced a steering group made up of such organisations has taken forward her recommendation in the form of a pool of independent business people. It is expected to start scrutinising these deals from this summer.
Graham’s report followed new false employment legislation, introduced in spring 2014, that recruitment industry figures said could tackle phoenixing by making directors of recruitment companies personally liable for unpaid tax and National Insurance of workers.
The recent government statement adds that at the same time, a new statement of insolvency practice (SIP16) will come into force, requiring insolvency practitioners to disclose to creditors additional information about pre-pack sales, particularly on the marketing and valuation of businesses.
But Glenn Flannery, partner at commercial law firm Nabarro, told Recruiter he did not think these moves would create “any great shakes” for the recruitment industry.
“It’s possible we might have a few less pre-packs as a result of the reforms and a few less bad ones. I think the market for pre-packs is not going to disappear.
“I think it is going to be largely business as usual,” he added.
However, according to Tom Astle, a partner at global legal firm Hogan Lovells, the reforms will make the process of phoenixing harder: “It won’t guarantee that the phoenix scenario will never happen but it will make it harder by improving transparency.
“It is still the case that if your business goes bust and you call in an administrator to look after it, the administrator’s job is to sell the business at the best price that he thinks is obtainable; and ultimately if the best offer on the table to buy the business back is from the people who used to own it, he will still do that transaction.”
He added: “The difference is now it has to be a lot more transparent about the other options he considered and what he did about it.”
Pav Reddy, partner at business law specialists Charles Russell Speechly, agrees, adding: “It won’t stop it but it is showing to creditors that there’s some determination of whether this is in the best interests of the creditors as a whole by allowing the company to survive and to ensure the management have paid the right price for it.”
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