Unscrupulous behaviour doesn’t always take the form of theft or embezzlement. Company directors will take advantage of legal loopholes to avoid paying their debts, and these practices can be just as dangerous.
A common example is phoenixism, which presents a growing threat to small businesses. The practice can be difficult to spot with a standard company director search, but we’re here to help. Here’s a closer look at phoenixism, and how our Aphrodite® tool can spot a Phoenix company and keep you out of harm's way.
What is a Phoenix company?
Phoenixism is the practice of setting up multiple businesses to avoid paying debts. When a business becomes insolvent, a company director can set up a new one, transfer the old assets and continue trading. The debts are left with the old business, meaning they can be written off when the business declares bankruptcy. This can happen multiple times, allowing directors to dodge their creditors indefinitely.
The exact number of Phoenix companies is unknown, but we've found 104,000 links identifying over 58,000 Phoenix directors over the last two years. Anecdotal evidence also suggests an increase in Phoenix companies in recent years, and it’s easy to see why this might be the case. With interest rates continuing to rise, borrowing money to save a struggling business is no longer a viable option for many companies.
When faced with this situation, the temptation to write off debt and start again is understandable. The problem comes when directors take advantage, repeating the process over and over, leaving a trail of hollowed-out companies in their wake.
Former Small Business Commissioner Philip King explains the danger:
“Phoenixism is sometimes done with the best of intentions, but it also creates a temptation for unscrupulous directors. When this behaviour becomes widespread, it can be extremely detrimental to the economy".
While phoenixism isn’t technically illegal, it can have serious consequences for the suppliers of phoenix companies. Smaller businesses may work with these companies in good faith, only to find themselves saddled with huge amounts of debt when the company declares bankruptcy. For an SME with tight margins, this is often enough to wipe them out completely.
Free download: KYC checklist
Learn 10 vital things you should do, and 10 risks to watch out for when extending credit to a customer in our free guide.
Phoenix directors have the law on their side
Phoenixism has become part of the culture of UK business. Sales teams are under immense pressure, and this encourages them to do business with a Phoenix company even if it could ultimately lead to losses.
To make matters worse, the laws around phoenixism are murky. During his time as Secretary of State for Business, Innovation and Skills, Vince Cable launched an investigation into “Pre-Packs” - businesses sold just before they go bust. It found that, when done correctly, this process can benefit the economy by saving jobs and allowing businesses to keep trading.
A good example of this is the clothing brand Joules, which was bought by Next during insolvency proceedings. This saved an estimated 1,500 jobs and gave the UK fashion sector a much-needed boost. The government is understandably reluctant to introduce laws that could limit economic growth, meaning that phoenixism is unlikely to be made illegal anytime soon.
Basic director checks aren’t enough
Without the law to back them up, companies have to take the initiative to protect themselves against phoenixism. This means thoroughly investigating every potential business partner for previous insolvencies. The problem is that, with so much information available, this is an impossible task for most companies:
- There are over 5 million active companies registered at Companies House, and a further 500,000 are added each year.
- Companies House don’t verify ID when registering a company, allowing directors to set up new companies under different names.
- Some wholesalers have thousands of Companies House accounts and are adding more each day.
- Directors have a range of techniques for hiding their links to previous companies. Dominic Chappel famously bought BHS for £1 to bury the purchase in the Companies House records.
Most small businesses don’t have the resources to trawl through these records. Instead, many opt for an automated credit check, hoping that it will flag up suspicious activity in a company’s past. Unfortunately, this is unlikely to work.
A standard credit agency will base its score on readily available information. If evidence of phoenixism has been obscured from the public, it probably won’t be factored into a credit score. This can create a false sense of security, putting small businesses at even greater risk.
SMEs deserve better. They need a reliable way to identify Phoenix companies without expending huge amounts of time and money. This is where we can help.
Nowhere to hide
We believe the odds are unfairly stacked in favour of Phoenix companies and their directors. Aphrodite® is our way of levelling the playing field. Our advanced director matching tool uses the latest in machine learning to help you find company directors with a hidden history of insolvency in a matter of seconds:
- Our powerful machine learning algorithm analyses the details of company directors and officers, including their names, date of birth, location and information on previous roles. It then uses this data to indicate the likelihood of links to other company profiles. This is presented as a percentage, indicating the confidence with which we can say the same person is linked to other director profiles.
- This adds another dimension to risk prediction. As well as analysing the current financial health of a company, you can look for hidden links to other companies that have failed in the past.
- Aphrodite® sorts through millions of registered directors and automatically matches accounts that may have been created by the same person. This saves you hours of painstaking work and leads to far more accurate results.
Confidence is key
Like all our tools, Aphrodite® is designed to prevent losses.
By spotting Phoenix companies at an early stage, you can refuse to extend them credit, avoiding potentially catastrophic debts down the line. Along with other tools such as Forecast View™ and TextScore®, you can use Aphrodite® to build a more accurate picture of company risk.
As Philip King puts it:
“The key is to get the information you need and use it well. Neglecting due diligence means you are effectively giving away money”.
➡️ Try our enhanced director search for free today!
