Adam Bernstein a monthly look at one of the legislative aspects that most affect your business, how it is run and how it can be more profitable. This month, John Davies looks at your rights when it comes to insolvency.

The latest official figures on insolvencies in England and Wales have something of the curate’s egg about them.

In the fourth quarter of 2004, liquidations of companies declined by 11 per cent over the same period in the previous year, but the number of individual insolvencies - bankruptcies and individual voluntary arrangements (IVAs) - increased by 34 per cent.

Whether your insolvent debtor is a limited company or not has implications for the likelihood of you getting your money, or at least some of it, back.

Where a business is a company, then as a rule the owner or owners, however many of them there may be, are not personally liable for their company’s liabilities. In an unincorporated business, including a partnership, the owner or owners are personally liable for the businesses debts.

But in either case, your first concern is to do whatever you can to get repaid. If a business goes into a formal insolvency procedure, such as liquidation, company voluntary arrangement, bankruptcy or IVA, you will be approached by the insolvency practitioner dealing with the case to ‘prove’ your debt. This should happen whether or not you have had separate notice of the insolvency.

Unfortunately, the nature of insolvency is such that the debtor business will not have enough funds to repay all its creditors.

But there is a difference between insolvency procedures and what are often called company rescue procedures.

In rescue procedures the business will not necessarily be beyond help but it will be in need of substantial restructuring. So the business will propose to creditors a rescue plan which will involve acceptance by creditors of a reduction in claims against the business. It is then up to the creditors to decide whether their interests would be better served by allowing the business to continue to trade, or whether they should petition for liquidation or bankruptcy.

When a company goes into a members voluntary liquidation, the company will be solvent so you should expect to see most, if not all, of your money.

But where a company goes into insolvent liquidation, or an individual becomes bankrupt, the debtor will invariably have few assets and trade creditors will have to write off their debts. Given this, the insolvency practitioner appointed to take charge in such cases has special powers to claw back funds from the directors or individuals concerned.

One of the most fruitful of these special powers concerns the phenomenon of “phoenixes”. What is especially annoying to unpaid creditors is when they see the proprietors of a company which has gone bust starting up a new company more or less straight away and appearing to be simply carrying on the business of the insolvent company as if nothing had happened.

Phoenixism is not an illegal state of affairs in itself. The law recognises that each registered company is a separate entity with an existence of its own.

So when a new company is formed it starts off with a clean slate and bears no automatic responsibility for any liabilities incurred by other companies in which the founder has been involved. This can often be hard to take, particularly when the new company operates from the same premises and carries on a similar line of business to the insolvent company.

Where phoenixism can be illegal is when a new company confuses customers and suppliers, whether intentionally or not, into thinking that a new company is the same as the one which was put into liquidation. What this means is that if ABC Ltd is put into insolvent liquidation, any person who had been a director of that company in the year leading up to the date of liquidation should not be a director or otherwise be involved with a company which is formed with the same or a substantially similar name as ABC Ltd. This restriction applies for five years.

If a person breaches this restriction, he or she commits a criminal offence and may be fined or imprisoned, or both. Of perhaps more interest, they can also be made personally liable for the new company’s debts.

Liability additionally extends to any person who acts as a director for the new company but acts on the instructions of a person who he knows to be barred from being involved with it.

In practical terms what this means is that if a business or consumer becomes a creditor of the ‘new’ company and remains unpaid, those unpaid funds can be claimed from the directors who have breached the phoenix restriction.

The chances of success of any action on these grounds will of course depend very largely on the degree of similarity between the names of the two companies concerned and their ownership and trading circumstances.

If you suspect that a company is trading under a name which it should not be using, you can check the current status of individual companies on the list of names maintained by Companies House on its web site, the address of which is www.companies-house.gov.uk.

John Davies is head of Business Law at the Association of Chartered Certified Accountants.