Phoenixism And Director Fraud Are Rising, What Can You Do About It?
As times remain tough, you need to be on the lookout for unethical behaviour. UK insolvencies have risen to a 14-year high. One of the consequences of this is an increase in fraud and Phoenixism.
Let’s take a closer look at how Phoenixism can affect your business and how we can help.
What is Phoenix company?
A Phoenix company is a business that has risen from the ashes of insolvency. The directors of a company facing insolvency create a new one to replace it. They can transfer customers, assets, and contracts to the new company. When the old company goes through liquidation it leaves behind unpaid debts. These include taxes, wages and supplier payments. Once it has shed its financial burdens, the new company operates as usual.
Sometimes Phoenixism can help bolster the economy, and companies avoid mass layoffs. But directors can repeat this process many times, often with the intention of defrauding creditors, and you won’t always be able to spot them.
Why worry about Phoenixism?
While you may find Phoenixism frustrating, it is a legal practice. More businesses are finding themselves in difficult circumstances, which makes it likely that more companies will turn to Phoenixism. Before the current financial crisis, we saw low inflation and low borrowing rates, this meant cheap borrowing for companies with negative bank balances.
Now that we are seeing rising levels of inflation, the result is that these ‘zombie companies’ cannot survive.
At Company Watch, we’ve monitored these zombie companies that you need to look out for. There are currently 247,631 in the UK, with a combined negative net worth of £128bn.
The temptation for company directors to write off debt and start again fresh is understandable. But unethical directors can repeat this behaviour, leaving devastation in their wake. The consequences of this behaviour has a crippling ripple effect, with suppliers and small businesses often hit the hardest. Companies become insolvent, leaving creditors unable to pay their debts. In turn, this can then saddle larger businesses with bad debt.
Phoenixism in action:
- UK Christmas savings club Farepak, went into administration in 2006.
- Over 100,000 customers lost their savings and suppliers were left unpaid.
- A new company called European Home Retail (EHR) was created by Farepak's former directors.
- EHR purchased Farepak's assets and continued its operation, leaving behind the debt.
Spotting a phoenix company isn’t easy
You need to be extra vigilant when it comes to spotting a phoenix company to avoid the burden of bad debt. The traditional way of spotting phoenixes was by manually combing through the Companies House database. But this is vulnerable to manipulation. Directors often use variations of their personal details to set up new, unique accounts, hiding their association with an insolvent company. With over 5 million businesses on Companies House, it can feel impossible to find these hidden links.
Standard credit checks are not comprehensive enough. If a company has hidden evidence of Phoenixism, a standard credit score is unlikely to uncover this. This is risky as it gives you a false sense of security when working with these businesses.
We created our enhanced director matching tool to allow you to connect directorships in seconds. We’ve uncovered 104,000 links identifying over 56,000 Phoenix directors in the last 2 years. These companies are across all industries and the number is rising with ongoing high inflation. It pays for you to be prepared.
Enhanced director matching to the rescue
Spotting Phoenix companies at an early stage is key. You can refuse to extend them credit and avoid devastating debts down the line. Phoenix directors can go to great lengths to bury their links to insolvent companies, but they can’t hide from us.
Introducing our enhanced director matching tool:
- Our powerful, automated machine-learning tool analyses director and officer details including name, location, and age.
- It then provides you with a confidence percentage that an individual director profile is linked to any other profiles. You can see all possible directorships that an individual may have held.
- This allows you to understand the current financial health of a company, and hidden links to other companies that have failed in the past.
- Our enhanced director matching allows you to sort through millions of directors on Companies House and match them to any hidden histories of insolvency.
- This can be done in seconds, giving you more time to accurately manage and mitigate risk.
Enhanced director matching can help you do your due diligence, and spot unscrupulous behaviour before it becomes a problem for your business.