FPB launches attack on 'phoenix' practice

phoenix rising

The Forum of Private Business (FPB) has called for more action to be taken on phoenix companies leaving their smaller creditors out of pocket.

Jumping on the back of an Office of Fair Trading (OFT) investigation into the corporate insolvency market and the steep charges of insolvency practitioners, the FPB believes a serious issue is the abuse of the phoenix process by some directors – where a new company is created from the ashes of the old, leaving any unsecured creditors unpaid.

Matt Goodman, policy representative for the FPB, said: “When a business drops out of the market, banks and the government take their cut, but what about the small business that has supplied that company and has never been paid?

“Or if a competitor wipes the slate clean of debts and carries on trading, where does that leave those small businesses struggling with their own finances?

“Though it may be too late to help those small businesses who have been hardest hit by phoenix practices in this recession, surely we can use this review to help isolate and correct the problem?”

In a recent survey carried out by the FPB, cash flow concerns as a result of late payments were voted the number-one concern by its members. A total of 23 per cent claimed the issue was their biggest headache – higher than a lack of sales, complying with health and safety regulations, and restrictions in credit.

If figures from the Insolvency Service are to be believed, the situation is likely to get worse. Recent figures show 4,716 compulsory liquidations and creditors’ voluntary liquidations in the third quarter of 2009, a 15 per cent increase on the same period in 2008.

Coincidentally, at the same time as the OFT investigation, an Early Day Motion (EDM) calling on the government to carry out a review of the UK’s insolvency laws to protect unsecured creditors has been signed by 30 MPs,

Dai Davies, Independent MP for Blaenau Gwent in South Wales, spoke out to say that problems associated with phoenix companies are adding to employment problems.

“Constituencies like mine, which have seen a huge decline in traditional jobs such as manufacturing, coal and steel, increasingly rely on family businesses and smaller employers,” he told the FPB.

“These companies need cash flow, yet here we have bigger businesses abusing them, in my opinion, by building up debts then changing their names overnight and starting again. The liquidation process means the taxman gets most of the money and smaller creditors are left with nothing.

“This is an area in which we’ve seen a lot of problems recently. I want the government to investigate it. Without doubt the issues surrounding phoenix companies must be addressed in order to help these SMEs survive and grow.”

Another MP, Mike Hancock, MP for Portsmouth South told the FPB: “The Better Payment Practice Campaign found that a quarter of companies have fallen foul of ‘phoenix companies’. Obviously, smaller businesses in particular need to get all the money that is owed to them, and even one default can make the difference between an otherwise well-run company going bust or continuing in business.”