Like a Phoenix from the Ashes

The phenomenon of UK companies declaring insolvency only to re-emerge under a new guise, thus sidestepping debts and leaving subcontractors in the lurch, highlights a glaring loophole in the current UK business and legal framework. I believe it’s an issue in the construction industry, and I’m seeing it time and time again

This practice, often called "phoenixing," allows businesses to avoid financial responsibilities, particularly to HMRC and subcontractors who are integral to their operations. The tactic undermines the principle of fair competition and jeopardises the financial stability and livelihood of countless subcontractors who rely on these payments.

Subcontractors, typically smaller businesses with less financial cushion, often bear the brunt of this unethical practice as they sit at the bottom of the creditor chain.

The impact extends beyond immediate financial losses, affecting their ability to pay employees, invest in future projects, or even continue operations. Meanwhile, the original company directors often face minimal repercussions, exploiting this grey area to kill debts and start anew.

The law allows owners, directors and employees of insolvent or dissolved companies to set up new companies to carry on a similar business. This is as long as the individuals involved are not personally bankrupt or disqualified from acting in the management of a limited company. When a company goes into administration or liquidation, the administrator or liquidator will try and get in as much money as possible to pay creditors. Sometimes, the best offer will be from the former directors or owners to buy back part or all of the business, including the company’s name or trading name. This is sometimes called a ‘pre-pack’ administration. The law allows this.

According to the Building Cost Information Service (BCIS) in their Latest construction firm insolvency figures, Construction firms accounted for 18.2% of all insolvencies in England and Wales in December 2023, according to the?Insolvency Service, with 364 registered construction businesses becoming insolvent. In the year to December 2023, the total number of construction firms becoming insolvent was 4,378. This was an increase of 5.1% on the 4,165 insolvencies recorded in the year to December 2022, and a 36.0% increase on the 3,218 in 2019.

It would be interesting to know how many of these companies emerged again, under a new name, brand or website, with the same management team as a ‘new’ company and how many were made insolvent due to this practice.

To ensure a more equitable business environment, we need to strengthen regulations, increase transparency in company restarts, and implement stricter penalties for those who abuse the system.

Protecting subcontractors and ensuring they are paid for their work is essential for the sustainability and integrity of the UK’s construction industry.

In my opinion, it’s not just a matter of financial and business ethics; it's also morally wrong.

Thanks for reading, and Happy Easter ??????????

Sonia.

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