Pre-Pack Administrations | Phoenix Company Fraud
A Pre-pack administration is an insolvency procedure under which an insolvent company sells its assets either to a third-party buyer or existing directors of that business through a new company. The sale of a company’s assets is arranged prior to the administration and completes shortly after the appointment of the administrator is confirmed.
The procedure is regularly adopted where a winding up petition is threatened, although it cannot take place after a petition has been issued.
The intent of the administration should be to:
- enable the business to survive,
- protect the assets and ‘work in progress,’
- protect the jobs of the workforce,
- ensure the best available protection for creditors.
The Pre-pack insolvency procedure is totally different to that where an administrator is appointed with the intent to dispose of the business if a third-party buyer can be found or otherwise liquidate the business.
In the situation where the insolvent business is sold to a new company controlled by the same directors, the new company is colloquially known as a ‘Phoenix company’ having formed from the ‘ashes’ of the failed company.
HMRC and the Insolvency Service are alert to the potential, fraudulent activity which, historically, has frequently been attached to the manipulation of Phoenix companies.
Both The Insolvency Service and HMRC enjoy wide powers to investigate companies and directors when fraud is suspected, which may lead to civil or criminal action being commenced. Hamraj Kang comments upon legitimate Pre-pack administrations and the potential for Phoenix company fraud.
Pre-Pack Administrations
A Pre-pack administration is a complex and potentially costly procedure which may be beneficial to an insolvent company, unable to pay its creditors where:
- the business is potentially viable.
- it is justified, given that creditors would not otherwise have an opportunity to be paid.
Transparency is paramount during a pre-pack administration and when used correctly is entirely legitimate. However, they are frequently concluded in haste, due to financial pressure, without advertisement to protect the business and prevent possible departures by key employees who may seek work elsewhere. In these circumstances, ownership may pass to existing directors through Phoenix companies with little or no transparency.
To tackle this problem, The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (‘the Regulations’) were introduced and came into force on 30 April 2021. These provide detailed conditions which an administrator must observe before disposing of company assets during the first eight weeks of administration, in circumstance where the sale of assets is to a connected party.
Phoenix Companies | Potential for Fraud
The Regulations are designed to avoid fraud of the nature frequently conducted through the misconduct of Phoenix companies such as, inter alia:
- defrauding general creditors - by transferring plant or machinery to the Phoenix company at an undervalue. The creditors of the insolvent company are deprived of the asset value for the benefit of the directors of the Phoenix company.
- avoiding tax liabilities - HMRC is a company creditor in respect of outstanding tax such as VAT and National Insurance Contributions and will be deprived of the same in the same fashion as all other creditors.
Consequences of Fraud
HMRC has the power to implement various steps when seeking to recover unpaid tax through civil investigations and may:
- make directors personally liable for VAT
- issue bankruptcy proceedings against directors
- pursue Director Disqualification Proceedings
- issue VAT assessments
- issue VAT penalty Notices
- launch a criminal fraud investigation
The Insolvency Service
The Insolvency Service has powers to:
- conduct its own investigations
- disqualify directors
- set aside transactions which were made at an undervalue
- apply to the High Court for the Phoenix company to be wound up
- initiate criminal proceedings
- make directors personally liable for the creditors’ losses
- pursue the family members of directors, creditors and shareholders who benefitted from transactions at an undervalue
Re-use of company names
The Insolvency Act 1986 states at section 216:
Restriction on re-use of company names.
- This section applies to a person where a company (“the liquidating company”) has gone into insolvent liquidation on or after the appointed day and he was a director or shadow director of the company at any time in the period of 12 months ending with the day before it went into liquidation.
- For the purposes of this section, a name is a prohibited name in relation to such a person if—
(a) it is a name by which the liquidating company was known at any time in that period of 12 months, or
(b) it is a name which is so similar to a name falling within paragraph (a) as to suggest an association with that company.’
Breaching this restriction is a criminal offence which may lead to a fine and/or imprisonment.
However, the liquidated company’s name (or a similar name) may be used where:
- the insolvent company has been bought from the liquidator and Notice of Intention is published in the London Gazette
- the Court grants for permission
- the new company has been trading and using the name for at least twelve months prior to liquidation of the insolvent company
How Can We Help?
If you are the subject of an Insolvency Service, HMRC investigation, or insolvency proceedings of any nature are threatened against you or any company with which you are involved, it is essential that you seek advice immediately.
The KANGS team are immensely experienced in handling insolvency proceedings of whatever nature assisting both companies, directors, and other officers.
If we can be of assistance, our team will be delighted to hear from you via:
Telephone: 0330 370 4333
Email: info@kangssolicitors.co.uk
We offer no-obligation initial consultations at our offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing and telephone.
