The classic example of a ‘phoenix’ company occurs when.
– the directors of an insolvent company put that company into liquidation.
– the directors incorporate a new company.
– the new company carries on business in succession to the insolvent company, using the goodwill of the insolvent company.
Where directors set up a ‘phoenix’ company in this way, TUPE does not apply to transfer employee liabilities to the new company because there is no ‘relevant transfer’ for TUPE purposes. Given the limited prospects of recovering their employment debts in full, from the insolvent company, employees will undoubtedly be upset to learn that former directors of their insolvent employer have set up a new company, carrying out the same business as the insolvent company.
If it appears that there has been a deliberate attempt to avoid honouring the insolvent company’s obligations to its former employees, frustrated employees (or, where they are union members, their union on their behalf) have the following options:
1. They could allege that there had been a transaction at an undervalue, undertaken with the intention of defrauding them as creditors – S.423 IA. If the directors of the employer liquidate the company and then start up a new company, which trades on the (unpaid for) goodwill of the employer company, that could be a transaction at an undervalue. If the intention was to avoid the liability to the employees, the cause of action could be made out. A director liable under S.423 has to compensate the victim of the fraudulent transaction for the losses sustained.
2. They could complain to the liquidator of their former employer. The liquidator has to investigate the conduct of the directors and report to the Secretary of State on whether the directors should face disqualification from acting as directors in the future. While treatment of employees is not directly relevant, some of the criteria for determining disqualification could catch the deliberate use of insolvency to defeat employee claims.
3. It is a criminal offence for a director to trade under the name of an insolvent company, without court permission – S.216 IA. The employees could notify the Insolvency Service of trading by the new company, which might lead to an investigation and prosecution.
We will be happy to discus this and any other issue that you might have. Call us on 07375 097443 or e-mail enquiries@lbjconsultants.co.uk
