In mythology, a phoenix is an immortal bird that, after death, bursts into flames and is reborn from those ashes; hence the expression “to rise like a phoenix from the ashes”. Within a business context a company that rises like a phoenix from the ashes is one that is reborn following liquidation.
There is nothing wrong with phoenix companies in Manchester, however, since 1986 it has been illegal for a phoenix company to re-use the name of a company in liquidation (Section 216, Insolvency Act 1986).
The mischief that Section 216 wanted to address was the way directors of an insolvent company continued to trade with a phoenix company using an identical or almost identical name. To an outsider, particularly a client or customer, it would appear that the company has continued to trade as normal, oblivious to the fact that the original company has gone into liquidation.
There are a number of losers in this situation. Firstly, the creditors of a company in liquidation will be left out of pocket whilst it is business as usual for the phoenix company directors and secondly, the debts of the old company are avoided but the goodwill is preserved. This may lull creditors of the phoenix company into a false sense of security over the track record of the business and it also unfairly damages the wider business community, the competition who carried on meeting all their debts, and the liabilities.
Insolvency Act 1986
Contravention of Section 216 of the Insolvency Act 1986 is a criminal offence. There are, however, certain circumstances in which a prohibited name can be used. They are as follows:
- Where the company in liquidation is sold by the liquidator. In these circumstances those acquiring the business can use the name, although appropriate notice needs to be given in The Gazette and also sent to all creditors known or whose names and addresses can be obtained through reasonable enquiries.
- Application to the Court to use the prohibited name can be made. This should be within 7 business days of the liquidation and runs for a period of 6 weeks from the date of the liquidation or until the Court decides whether to grant permission.
- The third exception is where there has been previous use of the name by another company or business. If this has gone on for a continuous period of 12 months up to the date of the liquidation, continued use of the name would not be a prohibition, even though the name was also used by the liquidated company.