Study must pour water on 'phoenix companies', says FPB

A new study into corporate insolvency must address the problem of 'phoenix companies' that let down their small firm creditors only to rise again in a new guise, a business group has said.

The Forum of Private Business (FPB) is highlighting the damage done to small and medium enterprises (SMEs) when the assets of a limited company facing liquidation are transferred to another business before the failed company's debts are paid.

In many cases the business inheriting the assets operates in a similar sphere as the failed one - with some or all of the same directors in place.

While it is legal to form a new company from the relics of a failing business, the FPB says that because assets can be moved from the failed business to the phoenix company at below market rates, there are less funds available at the end of the process to pay creditors what they are owed.

The market study, launched by the Office of Fair Trading, follows reports by the World Bank and insolvency practitioner body the Association of Business Recovery Professionals (R3), both of which pointed to the high cost of closing a business in the UK. OFT senior director of services Clive Maxwell said that the probe is set to look at the structure of the market, and to ensure that firms and practitioners are competing freely and that the market "is working well for the end consumers".

FPB policy representative Matt Goodman said that the study may come too late to help businesses already hit hard by phoenix practices during the current recession, but that the problems will hopefully be corrected for future creditors.

"When a business drops out of the market, banks and the Government take their cut but what about the small business which has supplied that company and has never been paid?" he said.

"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?"

IMAGE AP Photo/Rahmat Gul