Phoenix trading and liability of directors

Constituents frequently raise with their Members of Parliament the issue of phoenix trading and pre-pack administrations.

Some creditors who are owed money by a failed company are often outraged to find that the directors of these companies may suffer little personal loss and are often able to start up a new business in the same field. To a certain extent this is an inevitable consequence of corporate “limited liability”. For the purposes of the law, a company is a separate legal entity and if it trades with limited liability its directors and shareholders do not usually retain liability for the company’s debts should it become insolvent.

Legally, there is nothing in law to prevent a director of a failed company from starting a new business “overnight” if he has acted properly in managing the first company both before and during its insolvency. However, if the director of an insolvent company has deliberately acted to the detriment of creditors, action may be taken against him under both insolvency and company legislation. In certain circumstances, directors may incur personal liability for their acts or omissions in managing the company.

This Library briefing paper looks in detail at the legality of phoenix trading and at the personal liability of directors to the creditors of an insolvent company. In addition to the Insolvency Act 1986 (as amended) and the Enterprise Act 2002, this note looks at new provisions contained in the Small Business Enterprise and Employment Act 2015, which received Royal Assent on 26 March 2015. Following three government consultations, a number of corporate insolvency and governance reforms have been proposed since the summer of 2018. This paper (section 6) provides a summary of the key proposals.