Business Phoenixing Can Be A Practical Way To Avoid Business Failure

With the continuing economic downturn, increasing numbers of businesses are finding it difficult to continue trading. Frequently these difficulties are not because customers have stopped buying completely. Rather, they are buying in reduced volumes and asking for lower prices.

In this economic climate if they were not saddled with historic debt many of these businesses could continue to trade profitably. Since the Enterprise Act of 1984, it has been possible to request relief from corporate creditors using a Company Voluntary Arrangement or CVA. With the agreement of creditors, a Company Voluntary Arrangement allows a portion of corporate debt to be repaid at a manageable rate over a set period of time, the remaining debt being written off. A high proportion of early failures of the arrangement has led to much criticism of the process by creditors and insolvency professionals alike. The main argument against the CVA is that the fundamental structure of the business and its management team do not change. Therefore even with the burden of historic debt lifted the reasons for past failure are likely to repeat themselves.

Given the criticism levied against a Company Voluntary Arrangement, the process of Phoenixing (also known as Pre-Pack sale in liquidation or administration) has become more widely considered as a practical way of saving a business. Phoenixing is simply where a new company is formed which then buys the assets, contracts and goodwill of the failing business for a reasonable market rate. The legacy debt is left within the old business which is then liquidated thus allowing the new Phoenix business to trade on, debt free.

Since the beginning of 2009, much comment has been made about the Phoenix process in the media. Very often this has been from a negative point of view because of the fact that creditors are left with unpaid debts which may in turn lead them to suffer their own financial difficulties. However, what has been largely overlooked in these published arguments is the reason for the failing company is not the Phoenix process. The reason for the failure was the company's inability to continue to trade. In these circumstances, liquidation was extremely likely if not inevitable. The creditors would have been out of pocket regardless of the Phoenix process.

A further criticism of Phoenixing is that creditors are not afforded the right to reject the new company's proposal to purchase the business assets from the failing company. However, it is widely recognised that to go through an open process of sale due to failure (often using administration) often destroys many of a company's valuable assets such as good will and contractual obligations. In addition, discussing matters with creditors before a potential sale of assets opens the possibility of the creditor taking unilateral recovery action which may well be detrimental. As such, a Pre Packaged sale will actually deliver the best possible return to creditors. From November 2008 Creditors have been afforded better protection with the Insolvency Service publishing guidelines which require insolvency practitioners to ensure full market value is paid for the assets and provide a report to creditors of why this action is more beneficial to them.

The arguments for the Phoenix process are compelling. There is the obvious advantage that the new business is not saddled with the old company's debts. In addition, unlike a CVA, there is no obligation for debt repayment. Fundamentally and unlike the CVA, a Phoenix allows a new business to begin with the introduction of new procedures and ways of working. All or part of the management team may remain the same. However, inappropriate property location or lease agreements are not taken on by the new company giving it every chance of success. In addition, the new Phoenix company will offer a far better chance that employees' jobs are protected than if the business were simply liquidated. TUPE (Transfer of Undertakings and Protection of Employment) rules apply meaning that the maximum number of jobs are saved.

Clearly this process will not be right in every situation despite the advantages offered. However for businesses at risk of failure in these challenging economic circumstances Phoenixing must certainly be given serious consideration.