There has been intensified scrutiny in the media of “phoenixism”, which is where a company is placed into insolvency and a substantially similar business is then re-established free of historic debts and unpaid taxes. Phoenix activity is not, of itself unlawful.  UK insolvency law acknowledges that in appropriate circumstances, rescuing a viable business through insolvency and as a genuine last resort may safeguard both its value and its employees. However, if insolvency is exploited deliberately to avoid paying creditors—especially HMRC—directors may incur significant personal, regulatory, and financial liability.

Disqualification and regulatory action

Director conduct following insolvency is routinely reviewed by the Insolvency Service. Under the Company Directors Disqualification Act 1986, directors may be disqualified for between two and fifteen years if their conduct is found to be “unfit”. Repeated insolvencies, phoenix activity, and the continuity of trade through connected entities, as well as large unpaid tax liabilities, are all red flags.

Company name restrictions

A frequently overlooked risk is the restriction on re-using company names. Section 216 of the Insolvency Act 1986 prohibits directors of a liquidated company from being involved in the management of a new company using the same or a similar name for five years, unless strict statutory exceptions apply. Breach of these provisions constitutes a criminal offence and can render directors personally liable for all debts of the new company incurred during the breach period.

HMRC enforcement and personal liability

HMRC is often the largest unsecured creditor in phoenix cases and has developed a robust enforcement toolkit. Under Finance Act provisions introduced from 2020 onwards, HMRC can issue Joint and Several Liability Notices, making directors personally liable for company tax debts where there is a risk of tax avoidance, repeated insolvencies, or phoenix behaviour. Notably, HMRC does not need to prove fraud; evidence of a pattern and risk may suffice.

HMRC may also require security (such as a cash deposit or a bank guarantee) for future VAT or PAYE liabilities before allowing a new business to trade. For newly established companies, such demands can have a significant impact on cashflow and commercial viability. Refusal of VAT registration or discretionary Time to Pay arrangements where phoenix behaviour or repeated insolvencies are present can further restrict a business’s ability to operate.

Commercial and dispute risk

Beyond formal legal sanctions, phoenixism can materially affect the commercial prospects of a successor business. In practice, lenders, landlords and trade counterparties frequently treat directors associated with prior insolvencies as higher risk, often resulting in demands for personal guarantees, restricted credit terms or refusal of facilities. In relationship-driven sectors, this loss of commercial confidence can have enduring reputational consequences.

Disputes may arise from insolvency practitioners under Insolvency Act 1986, ss.213–238, from HMRC under Finance Act 2020 and Joint & Several Liability Notices, or from creditors with contractual claims against new entities. Evidence from Insolvency Service reports and practitioner journals shows that such disputes can arise months or even years after trading commences, divert management time, increase costs, and create operational uncertainty.

A cautionary conclusion

Phoenixism may appear, at first glance, to offer directors a clean slate. In reality, it often creates ongoing exposure rather than closure. Regulatory scrutiny, personal liability, criminal sanctions and commercial instability are all real risks for directors who underestimate the legal framework surrounding insolvency and restructuring.

For directors seeking to rescue a failing business, early professional advice, transparency, proper valuation and strict compliance with insolvency and tax law are essential. Without these safeguards, phoenixism can quickly turn from a perceived solution into a significant personal and commercial liability.

Author: Sheetal Shah, Partner in the Corporate & Commercial team at SA Law