A recruitment executive who was allowed to buy back the assets of his bust company in instalments, despite it accumulating almost £3m of debt, has placed his new business into liquidation after falling behind with promised payments to the administrator.
The news is the latest event to raise questions about the practice of “phoenixism”, accounting’s controversial art of liquidating companies to allow directors to return with a new entity, free of debts.
The tactic, which is legal, is often justified by supporters who argue it can save jobs and help secure some returns for creditors – although HM Revenue and Customs (HMRC) estimates it costs the UK taxpayer hundreds of millions of pounds a year.
If a company goes bust it doesn’t have the money to pay the taxman. So allowing someone to buy the company increases, not reduces, the amount available to pay the taxman.
That a phoenix then goes bust again just shows that it wasn’t a good business in the first place – that’s why it went bust. But this issue of HMRC losing out. By definition the pheonix offer must be the best available and also better than the returns from liquidation. Therefore it – by definition – increases payment to HMRC, not reduces.
Yes, I know what Jim is going to say. The above is still true.
And never forget the Revenue are always first in line for any monies owed.
As long as the owner is not a bankrupt and thus excluded, what’s the problem ?
The problem is that the director can walk away from his debts to his suppliers, effectively stealing their goods, by buying the business excluding its debts from the liquidator. The Revenue end up quids in because they tax all the money that he subsequently takes out of it (and any profit he actually declares for corporation tax).
That’s my understanding, anyway. Might be out of date.
What about the other creditors? They won’t be doing business with the new company. Would you? So you’re lining up someone else to be fleeced…
Lol. Its almost as if I’ve got a point isn’t it?
But hey all those ‘entrepreneurs’ who keep going bust are such a benefit to the nation aren’t they? I mean all the success stories (James Dyson, Antony Bamford, even the arch self-promoter himself, Beardy Branson) are a litany of failed companies before they hit the motherlode. Aren’t they?????
Or could it be that the criminals and fraudsters just use limited liability to make it easier to do what they want to do anyway?
“That a phoenix then goes bust again just shows that it wasn’t a good business in the first place – that’s why it went bust. “
You really are terminally naive if you think the reason people like this set up companies is to run genuine businesses and make long term profits. Its to defraud people of their money as quickly as possible, and disappear with it using limited liability to hide behind. THAT is their profit. Far easier to achieve than making an honest buck. Look at the people behind these operations. They are never short of a bob or two.
That last is the long firm fraud. Rightly illegal.
It might be illegal, but does anyone ever get prosecuted? Nope, they all get to walk away with their loot. Like the blokes in this one will. It doesn’t have to be an out and out fraud. Its just that they know that as long as they get plenty of money out while the going it good, it doesn’t matter if the whole thing falls apart at any point. There’s no incentive to try and keep the company afloat, its always better to let it go bust, because they get to keep their share of the loot, and the creditors lose out. You keep banging on about everything in economics is based on incentives, what exactly are the incentives in running a limited company? Is it to try your utmost to trade legitimately and stably for the long term, or is to to get in as much debt as possible, take as much out of the business as you legally (or even illegally) can, pay yourself as big a salary as you can, and ride the tiger until it inevitably collapses?
What about that current example – MFS Bank/Raja? He nicked hundreds of millions from the company that he founded. He’s not even been charged with anything, and the money will never be recovered.
The Long Firm by Jake Arnott is a good read.
Any system that functions can be gamed. Strap it down until it’s watertight and it stops functioning, just like computer security. It used to be the case that Oxford St. retailers expected to lose 10% of stock to shoplifters. That was the Laffer sweet spot. More security and they’d deter shoppers and lose sales, less and they lost too much stock and profit.
So then the question is, are the benefits of limited liability worth the drawbacks? I reckon they are. There’s plenty of work my missus and I would never have done were we not a Ltd. Either we’d never have been considered for it, or too risky for us personally should the client have fucked us around.
The current system is so far from watertight its more like the gash in the side of the Titanic. All it costs is £100 to start a company, and that lets you open a bank account and trade for a year or so before the authorities come looking for you. Its a fraudsters dream.
Are you really saying that making opening a limited company cost (say) £1000 is going to prevent genuine businesses from forming? If you can’t afford that I’d say you have no right to be in business in the first place. Make people have some skin in the game. At the moment its zero from the person starting the company and all the risk is held by society at large.
You have a point. We’d have put up a grand to start.
Just enforce the laws on trading while insolvent.
The way limited liability companies are supposed to work is that they do not incur debts which exceed their share capital so at all times they could be wound up with all debt paid. While unexpected debts might result in unpaid creditors, such as losing a lawsuit and having to pay damages, the normal course of business should not.
And if you’re intending to get rich by exploiting limited iability, the fee to set it up is no obstacle. Increasing the fee only drains money from legitimate businesses.
Its no good saying ‘enforce the laws’ because they never do. The authorities have no inclination or ability to do so.
I still say that as limited liability is so valuable to the person(s) forming the company, they should have to pay handsomely up front to get it. £50-100k should do it. Money to be held by the State, interest at base rate added monthly, either given back when the company is wound up with no debts, or used to pay creditors if a firm goes bust. Skin in the game……..
It’s not really what we’re talking about, is it? It’s serially going bankrupt.
It’s probably a good idea if people have conducted a business & failed, they aren’t saddled with the debts of the business for the rest of their lives they’ll never be able to pay.. But it’s another thing, when someone has failed in a business resulting in unpaid debts, should be free to start another business with limited liability. There ‘s a strong possibility those seeking to trade with them will not know their history. Since they’re hiding behind a company name. Would they trade with them if they knew?
I think it would be a better idea if a person who has previously bankrupted their company couldn’t start another one unless the debts of the previous one were paid.
In the more blatant cases they’ll ban the villain from being a Company Director or a “Shadow Director” for a period of years, so he/she can be sent to jail if caught again.
Managing a business to the detriment of its creditors is a criminal offence but I cannot remember when I last heard of someone getting prosecuted.
Don’t they just put it in the wife’s name then?
Although I suppose that gives the diversity an advantage; more wives means more serial companies.
Hence their being banned from being “Shadow Directors”! Although we make occasionally doubt it, some civil servants have IQs in excess of their shoe size.
At least for the 12 months it takes to get out of personal bankruptcy. That would stop the serial phoenix companies.
should the client have fucked us around.
Mmmm… It’s actually poor credit control. Never get in a situation where a client not paying will cause a problem. You’re a business, not a bank.
Does it though?
Aren’t most of these pre-packs, where the sale*, and price, is agreed before the old company goes into liquidation, usually for a sale to a new company formed by the shareholder of the old one.
So we don’t know whether it means more money for the creditors or less, because the value of the underlying business – without the debts – is never tested in the market.
It’s the pre-packs that I’d ban. They’re clearly corrupt and should never have been allowed. Make all company liquidations involve some sort of auction or tender process, advertised on some official bankruptcy website, and open to all bidders. Then we’d know whether the bid by the previous director’s new company is in the creditors’ best interest or not.
And it would make people less inclined to wind up their company unnecessarily, because if there’s any real value in the underlying business, they might lose it if someone else can outbid them (with the money going to the bankrupt company’s creditors, not to the old owner).
* We all know this, but it’s the business being sold, not the company; the administrator sells the business (free of debt) out of the company. The company is left with the sale proceeds and the debts (the debts being much bigger), and then wound up.
Despite some directors taking the piss with their high wages, it’s still a better system than the one we have for government operations going bust.
It’s not just that they nicked a factory from Jingye Steel, they now lose money from having on thieved it. Normal criminals make money on what they steal.
Whether the offer is the best depends on the details of its terms. A promise of £50M in five installments may be worth less than immediate payment of £20M if the business is unsustainable and only the first installment actually gets paid.
And shuffling the liability around so that HMRC gets paid at the cost of other creditors is effectively an extra stealth tax on those creditors.