What is a phoenix company?

If a business you're working with suddenly closes or restructures, it can create uncertainty about what comes next. Understanding how these situations unfold and what they might mean for your cash flow or supply chain is an important part of managing risk. This article walks through the key things to know about phoenix companies, what to look out for and how to protect your business with clear financial insight and regular credit checking.

What are phoenix companies?

When a company closes because it has become insolvent and a new business immediately appears in its place, it is often described as a phoenix company. The term comes from the mythical phoenix, a bird said to rise from its own ashes. In the same way, the new business can seem to emerge directly from the old one. In some cases, this can be a legitimate way for directors to preserve jobs, protect the underlying value of the business and restart after a genuine failure. However, in other situations, phoenixing can be used to walk away from debts, leave creditors unpaid and create a new business with an unfair advantage.

Because phoenix activity can sit anywhere between responsible restructuring and the deliberate avoidance of obligations, it’s important as a business owner to understand what it is, why it happens and how to protect yourself.

When can a phoenix company occur?

A phoenix company typically arises when three things happen:

1. An existing company becomes insolvent and stops trading.

2. Some of its assets, intellectual property, brand, or customer base move to a newly formed company.

3. The directors or management team of the old company continue running the new company.

The key point is continuity. People outside the business often see the new company as effectively the same as the failed one, even if it has a different legal identity. It’s important to understand that phoenix companies are not automatically illegal. UK law allows directors to purchase assets of an insolvent business, provided the process is fair, transparent and overseen by a licensed insolvency practitioner. The challenge lies in distinguishing legitimate rescue from behaviour intended to avoid paying debts.

Legitimate phoenix companies: when restarting is allowed

Not every business failure is caused by misconduct or mismanagement. Many companies close because of factors outside the directors’ control, such as:

• A major customer failing to pay

• A sudden change in the market or economy

• Significant increases in costs or supply chain disruption

• Unexpected events that damage operations or cash flow

In these situations, restarting under a new company may be the only viable way for directors to keep the business alive and protect jobs. A legitimate phoenix company will show the following characteristics:

• Proper oversight by an insolvency practitioner
  A regulated insolvency professional must manage the original company’s closure. This ensures assets are valued correctly and creditors are treated fairly.

• Assets sold at fair market value
  Assets cannot simply be handed to the new business. They must be purchased at a fair price, usually supported by independent valuations.

• Clear separation of old debts
  Debts from the old company cannot be automatically moved to the new one. However, directors must still cooperate with investigations into the failure and may face consequences if they traded irresponsibly.

• A genuine attempt to maintain continuity
  Legitimate phoenix companies often aim to preserve jobs, save valuable contracts or continue services that would otherwise disappear.

When handled properly, a phoenix company can offer a fresh start and prevent greater economic loss.

Problematic phoenixing

Unfortunately, some directors use phoenix structures to escape debts or repeatedly close failing companies without taking responsibility. This behaviour is often called rogue phoenixing or abusive phoenixing. Warning signs of problematic phoenix activity include:

• Repeated insolvencies involving the same directors
  If a director has a pattern of closing companies and immediately starting new ones with similar names, it may indicate a riskier trading approach.

• Assets transferred for little or no money
  Selling assets below market value harms creditors and may be considered misconduct.

• Unpaid creditors left with significant losses
  If a company leaves a trail of outstanding bills, County court judgments (CCJs) or disputes, and then reappears with the same leadership, this should raise concern.

• Sudden closure followed quickly by a near-identical business
  A new company that uses the same trading name, website, branding, directors or location as the old one could signal phoenix activity.

• Poor credit behaviour before failure
  Late payments, frequent requests for longer terms or declining credit scores often appear months before insolvency.

While the Insolvency Service may take action against abusive phoenixing, creditors can still suffer losses if they do not monitor the businesses they work with.

Why phoenix companies matter to your business

Understanding phoenix activity is important because it can affect both your customers, partners and suppliers. Here’s how that can in turn impact your business:

• If a customer becomes insolvent, you may lose what they owe you.

• If a supplier collapses, your operations or stock availability may be disrupted.

• If you rely heavily on one trading partner, a sudden failure can seriously impact your cash flow.

Knowing the financial stability of the businesses you work with helps you protect your own company, plan ahead and avoid avoidable losses.

How credit checking helps you spot phoenix risks

Phoenix companies often leave signals in their financial and credit histories. Credit checking gives you visibility over key areas to spot these risks including:

• Credit score
  A strong business credit score suggests a stable organisation that pays its bills on time. A low or declining credit score can indicate stress and help you spot trouble early.

• Director history
  Business credit reports show if directors are linked to previous failed or dissolved companies. Patterns of repeated insolvency can help you identify higher risk.

• County court judgments (CCJs)
  CCJs reveal past disputes and show that the company has previously not paid a debt, this can signal cash flow issues or financial difficulties. 

• Payment performance
  A company’s payment performance shows how they typically pay other companies, whether they’re on time, or late. If a company routinely pays late, it can indicate deeper financial challenges.

With a Capitalise account, you can easily check this information on your customers, suppliers and prospects and make informed decisions about extending credit or entering a new trading relationship.

How to protect your business when trading with potential phoenix companies

1. Conduct regular credit checks

Credit checking should not be a one off exercise. Company financial positions change frequently, and ongoing monitoring alerts you when risk increases.

2. Set appropriate trade credit limits

Use a company’s credit score, credit limit and repayment history to determine how much credit you are comfortable offering. Do not set credit limits based solely on the size of the order or your relationship with the customer. For more tips on this topic, you can read our article on how to set trade credit limits.

3. Request upfront or phased payments

If a business shows signs of instability, consider asking for full or part payment before work begins to reduce your exposure.

4. Review director history carefully

If you see that a company you work with has a directors linked to repeated company failures, you might want to set stricter credit terms or shorter payment windows.

5. Stay alert to behavioural changes

Late payments, sudden communication issues or requests for more generous terms often appear before insolvency. Make sure that you’re up to date with any of these changes to spot issues early on. 

6. Monitor key suppliers

A vital supplier that becomes unstable can disrupt your operations, increase costs or force you to delay customer work. Credit checking helps you plan alternatives in advance.

Legal protections and rules around phoenix companies

UK law includes safeguards to prevent abusive phoenixing, the legislation for this is found in the Insolvency Act 1986 and specifies the following:

Restrictions on using a similar company name

For five years after insolvency, directors cannot use a similar name for a new company unless specific conditions are met, such as obtaining court approval or purchasing the business correctly through an insolvency practitioner.

Director investigations

Insolvency practitioners must report director conduct to the Insolvency Service. Directors who traded irresponsibly, took excessive risks or worsened creditor losses can face penalties.

Possible personal liability

Directors involved in wrongful trading, fraudulent trading or misconduct may become personally liable for company debts.

Director disqualification

Serious misconduct can result in a ban from acting as a company director for up to 15 years.

While these measures help protect creditors, they do not eliminate risk entirely. The best defence for your business is ensuring you have access to clear financial information and responsible credit management.

Staying informed and reducing your risk

Phoenix activity can create both challenges and opportunities across your supply chain and customer base. While some businesses genuinely need a fresh start, others may leave behind financial risk that could affect your cash flow or operational planning. Having visibility over the financial health of the companies you work with puts you in a stronger position to make informed decisions and respond quickly if circumstances change.

Capitalise gives you access to the financial insight you need to stay ahead of potential issues, from checking your own credit profile to running detailed credit checks on customers, suppliers or prospects. By staying informed, you can trade with greater confidence and safeguard your business against avoidable disruption. Sign up today to get started.