There’s no more galling experience – you’ve got a business relationship with a company, and you keep up your end of the bargain by supplying products or services only for them to go bust, leaving a trail of unpaid debts and ill feeling in their wake.
As if that isn’t bad enough, you then hear that the same directors have immediately started an almost identical business, trading debt-free as if nothing had happened.
It’s an all too familiar scenario, not just in the fresh produce world, but in business generally. The practice is known as “phoenixing” – from the mythical bird that rises from the ashes – and is particularly difficult for unpaid creditors to stomach. In some cases, described as a “pre-pack administration”, assets are sold to the directors by an insolvency practitioner before the company is liquidated.
One question that is often asked is how can it possibly be legal for failed directors to start up, debt-free, straight away as if nothing had happened? And in extreme cases even repeat the practice with a succession of business failures? Unfortunately, the law only prevents fraudulent trading, not incompetent businesspeople, as Ben Jones, partner at Edgware-based Darlingtons Solicitors explains: “There are many misunderstandings and negative connotations associated with phoenix companies and they can be very controversial in the sense that creditors of the old company who remain unpaid are often understandably very unhappy to see a new company start up using a similar name to the old one, and which may even have some of the assets of the old company but not the liabilities.
“It is important to note that the formation of a new company in this matter is entirely legal. However, in order to remain legal, there are a number of rules that must be complied with.” These rules include not forming a new company with a name too similar to the old one.
It is still relatively rare for directors to be barred after their businesses fail. To put it into figures, of the average 14,000 corporate insolvencies in England and Wales each year, there are less than 1,200 company director disqualifications.
The fact that, in the eyes of the law at least, phoenix companies are not doing anything illegal, makes reporting on the cases difficult for media. While they can report on the initial business failure and state that the directors have started another business under a new name, any suggestion of deliberate wrongdoing would leave them open to a libel challenge. Readers understandably want to see the name of the directors dragged publicly through the mud, but this would likely be deemed to be maliciously damaging their reputation.
Where there is recourse to the law is where examples of fraud can be proven. The most common type of fraud occurs when directors do not correctly value the assets that are being sold to the new company, in so doing ensuring that little or no funds are available to the creditors of the original business and are unable to claim back money they are owed while the new one takes all the assets.
There is a legal avenue, but it can be tricky. “It is a constant disappointment to unpaid corporate creditors to establish that it is difficult and expensive to legally pursue individuals who hide behind corporate entities,” says Jones. “Wrongful trading is a civil, not criminal offence. Fraudulent trading, a criminal offence under English law, is even harder to prove.”
In the food industry, Jones adds, supply chains are commonly international, which may cause additional complications and risks based on different jurisdictions.
So what can you do? Vigilance and knowing who you are working with is key, and references can be very useful when working with new parties. If anyone thinks phoenixing is an easy way out, they should also be aware that gossip can spread fast and they may not find it so straightforward to pick up new business.
That, perhaps, is still the shunned creditor’s biggest weapon. It seems you still can’t beat good old-fashioned word of mouth.
Legal expert Ben Jones’ top tips for staying ahead:
• Thorough credit checking
• Search the list of disqualified company directors
• Search Companies House for similar trading names
• Consider asking for personal guarantees/bank guarantees/credit letters/trade references
• Risks can sometimes be greater with relatively modest amounts – repeat defaulters often have a clear idea of what will prompt a creditor to spend money to pursue them
• Just because you have been paid once on time do not drop your guard
• If you are determined to take action against an unscrupulous director, seek to take control of the liquidation process quickly; seek to appoint the liquidator and possibly pool resources with other aggrieved creditors. But be aware that in commercial terms, you could still be “throwing good money after bad”
