A recent survey of SMEs has highlighted the controversy surrounding insolvency law, with 96 per cent of those questioned saying they thought insolvent firms should not be allowed to launch similar companies.
Carried out by the debt collection agency, Daniels Silverman, the survey demonstrates the concern felt by SMEs over the practice of pre-pack administrations – often dubbed as ‘phoenixing’ and seen as a method whereby insolvent firms ‘dump their debt’.
Commenting on the findings, Carole Hughes, managing director at Daniels Silverman, said: “Our survey results indicate that many SMEs would like a rethink in insolvency law to protect companies from unscrupulous directors that take advantage of pre-pack administration.
“They have told us they are becoming more and more frustrated by directors avoiding their debts by going through a pre-pack administration to form a new company from the remains of a failed company.”
Beverley Budsworth, Managing Director of The Business Debt Advisor, commented:”Buying back or restarting a failed business is a tough decision, and all too often new companies, set up out of the ashes of failed companies themselves, fail as they have been underfunded from day one.
“However, there are many success stories and I don’t think we should have an insolvency regime which makes it impossible for owners to buy back the business.”
Paralleled by rising insolvency levels in general, the number of phoenix companies has also increased, frequently generating a ‘business as normal’ impression and hiding the extent of insolvent companies.
Critics of pre-pack administrations claim that customers are misled by new ‘phoenix’ companies, as they operate under a similar name to their predecessor which could lead the customer to believe it was the older, more established company.
According to Daniels Silverman, many of the SMEs surveyed said they believed that creditors lending to these insolvent companies need further protection under the insolvency law. Although the insolvency law does provide some degree of protection, using a completely different name is not outlawed.
Highlighting the plight of the creditors, Hughes said: “It is very hard for a creditor to see an insolvent company trading ‘as usual’ often from the same premises, under the same director and with the same offering, while they are left significantly out of pocket because the money owing to them has been written off.”
Tony Costigan, Managing Director of Pheonix Company Consultants, specialises in company recoveries through pre-pack deals. He said: “In most cases the directors have personally lost substantial sums of money as they have continued to support the failing company way beyond their own financial means.”
In addition, he explained that allowing a company to re-start under a new name means that countless jobs, which would otherwise have been lost, are saved.
So whilst many SMEs voice their resounding dissatisfaction at phoenixing companies and insufficient insolvency laws, in fact, most are just calling for the smaller number of companies who exploit the system to be monitored.
Carole Hughes added: “While there are legitimate reasons for many pre-pack administrations we would call for a look at the number of unscrupulous directors who are exploiting the process to avoid paying their debts and profit from pre-pack administrations.”
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