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Pheonix companies

By The Drum, Administrator

March 15, 2002 | 5 min read

Photography: Liam Bailey, Photonica

The forthcoming Enterprise Bill will have an impact on virtually every market sector - not least the often volatile creative industries. Welcomed by some observers and treated with contempt by others, the Bill (due to be published this month) aims to bring Britain's regime for corporate and personal bankruptcy closer to entrepreneurial US models.

The reason for the suspicion is simple; the changes will see the three-year restrictions on bankrupts participating in business activities replaced with a flexible discharge period ranging from one to 15 years.

It is this flexibility that allows businesses or 'phoenix' companies (businesses owned and run by people whose previous company went to the wall) to start up again so soon that opponents of the Bill find worrying.

Phoenix companies have had a bad reputation for some time. Prior to the Insolvency Bill of 1986, some directors deliberately ran companies into the ground, then bought the assets at a knockdown price from a 'tame' liquidator, leaving creditors with nothing.

So, whilst the Enterprise Bill seeks to promote entrepreneurship and 'enterprise', it appears, on the face of it, to provide blank support to the company owners of failed business ventures. As a check and balance, the Bill envisages something akin to the procedures adopted for the disqualification of directors, but this has been very 'hit or miss' insofar as addressing the issues of honesty and culpability.

Notwithstanding the provisions of the Bill, directors continue to have a duty to consider the creditors of the company before shareholders where a company is unable to trade out of difficulties, which is not always properly appreciated or understood.

The question most sceptics ask is whether companies that continue to fail, leaving a trail of unfulfilled creditors, should be allowed to rise repeatedly - sometimes with very little variation in their operating names or business plans. The answer to this is clearly no, but this is not representative of every 'phoenix' situation.

The positive side of the Bill is that it also promotes a 'rescue culture'. Cases exist where the chance for businesses to start over again can be a means by which to salvage good profit-making parts of the venture - and in doing so offer some promise of continuity for suppliers and creditors. In this way, the new legislation does promote entrepreneurship and 'enterprise'.

A case in point is the Morgan Partnership. This ad agency, run by well-known entrepreneur John Morgan and based at Spiers Wharf, Glasgow, went into liquidation just before Christmas. He has now started a new agency from the same premises, originally called Take One Egg. In John Morgan's view, a phoenix company was the only way to secure a new business, to the benefit of employees and creditors.

Overtrading is a common cause of insolvency and had a bearing on the case of Fire Control Glasgow. The company, successful in generating business, came into financial difficulty when having to fund work until its completion. The delay in receiving payment caused cash flow problems. Ultimately, the company ran out of working capital and suffered irretrievably from the unexpected loss of a supplier.

In this situation, acting on behalf of the company, Boyds Solicitors purchased the assets from the administrators, enabling what was a successful operation to restructure itself and recommence trading under the umbrella of a new company Fire Control Ltd.

Robert Jenkins, one of Scotland's best-known shoe stores, was forced to call in the receivers after over-expansion and then had to announce the sudden closure of its 12 Scottish stores. Acting on behalf of the receiver, Boyds arranged the transfer and sale of the assets to the new firm - the firm of Robert Jenkins.

The advantage to employers and creditors in all these instances was that new businesses were formed out of the salvageable parts of the old insolvent ones. This led to jobs being saved and to a higher return to creditors.

Without such financial rescues or phoenix companies, the administrator or receiver would have been under an obligation to close the businesses and sell the assets at auction, with no guarantees as to the fate of the creditors or the company's employees.

Even with the remedies presented in the Bill, responsibility still lies firmly with company owners and directors to take the appropriate action at the right time. If these companies had sought legal advice prior to insolvency, they would have been advised on business strategies that could have prevented their bankruptcy. This includes efficient cash collection to improve cash flow, the voluntary restructuring of the companies, such as dealing with any necessary redundancies, and any re-financing negotiations with both the creditors and banks.

So, whilst it is reasonable to assume that the Bill may encourage more businesses to go into receivership, it should not overshadow the potential for existing management buy-outs or restructuring packages to affect a turnaround. The message is for directors of companies entering the twilight zone not to put their heads in the sand (so exposing their rears) but to exploit the services of specialists to support the business strategy instead.

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