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What is a "phoenix" company and what happens when regulators find one?

Publication: 
Editorial Staff
chiefofficersnet

The phoenix is a creature of ancient Greek mythology, It was creature of Paradise and, when it became old and frail, it would self-immolate and a younger, stronger, even more beautiful version of itself would rise from the flames. It is also to be found in Egyption myth where, as the "Lord of Jubilees" it symbolised a fresh start The symbolism of the old going down in flames and something new and shiny, but essentially the same creature, replacing it is a far from mythical part of the corporate landscape. Unlike the bird, a corporate phoenix is rarely a good thing.

When a company enters liquidation, as a matter of law it can only conduct through the medium of the liquidator. The liquidator takes possession of all the companies assets, including contracts which it has entered into. A liquidator can disclaim onerous contracts (excluding those for security) and, for a short time, continue with or sell contracts which have a benefit.

Often, when a company goes into liquidation, its assets are transferred to a new company (lawyers call it "NewCo") and the liabilities are left in the old company. NewCo is sold, the proceeds going to the liquidated company for the benefit of the liquidator, the exchequer and unsecured creditors (in that order).

One of the essential tenets of insolvency law is that a person who is responsible for the failure of a company cannot immediately start a replacement and continue business as if the failure had never happened. So directors (and in some countries controlling shareholders) of a failed business are not permitted to continue the business under a new name. Even the customer list is an asset of the business, not the personal property of the shareholders, directors, employees or anyone else associated with the failed company.

In the case of insolvency, the government regulator responsible for the supervision of companies will decide, upon the recommendation of the liquidator, if the directors were culpable and, if that culpability is sufficiently serious (for example allowed the company to continue to trade whilst insolvent with no realistic prospect of recovery, so increasing the losses to creditors) the regulator may impose penalties such a period of disqualification as a director. This correlates with the ban on bankrupts (i.e. individuals) being allowed to become company directors during the period of their bankruptcy.

In some countries, anyone who is proved to have exercised the function of director, sometimes called a "shadow director" can be referred to the regulator. This may or may not be someone who had a significant shareholding in the company. Shadow directors who are considered culpable can also be banned from being involved in the management of companies.

In many countries, the question of managing a phoenix companies is decided ex post facto: there is often a tolerance for someone's first failure and an attempt to get back on his feet, so to speak. Rarely will directors face criminal prosecution unless there is evidence of personal enrichment at the expense of the company and, therefore, its creditors. Fraud, criminal breach of trust, embezzlement are crimes and pushing the company into insolvency will not hide that conduct.

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