28 September 2018 by

Clipping the wings of a Phoenix to protect workers

Directors of companies which “phoenix” to avoid paying workers and other debts could face hefty fines and disqualification under new Government plans.

The proposed reforms are aimed at tackling those companies who are guilty of “phoenixing”, namely deliberately winding the company up to avoid debts, only to set up a near identical business under a new name almost immediately afterwards.

The recent corporate collapses of BHS and Carillion, with thousands of workers losing their jobs, defaults on redundancy payments and huge pension deficits led to the calls for a crackdown on irresponsible capitalism. As part of that crack down Government ministers want tougher insolvency laws to stop such behaviour.

According to business minister Kelly Tolhurst, while the “vast majority” of UK companies were run responsibly, some “recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies”, which “can’t continue.”

The key proposals are that:

  • company directors who dissolve their business to avoid paying off staff and suppliers risk being hit with fines and/or disqualified;
  • the Insolvency Service could also make companies prove they can afford to pay salaries and pension payments in circumstances where they are paying dividends to investors; and
  • companies in distress would be given more time to continue trading through a restructuring process.

The proposals represent the biggest changes in corporate insolvency regulations in almost 20 years. A spokesperson for R3, the trade body for insolvency and restructuring professionals, made the point that:

 “a balance must be struck between ensuring directors are held to account, and giving distressed businesses the chance to be restructured. Measures that focus more on the former will only discourage entrepreneurship and damage the UK’s reputation as one of the most attractive places to do business.”

This is all the more important as the UK’s exit from the European Union approaches. An efficient and effective insolvency and restructuring regime will be critical in maintaining the success of UK business.

It is not clear at this stage exactly what specific changes there will be, and full details are due to be announced by the Government in the autumn. We will be keeping a close eye on the key developments and will provide updates when the Government publishes its more concrete proposals.

In the meantime, for advice about corporate restructuring, or employee issues in the midst of a potential winding up, please contact one of our Corporate Team or our Employment Team



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