Bust companies revived in 'phoenix' deals more likely to fail again, study finds
A recent study has found that companies revived through "pre-pack" administrations, where their previous management reacquires the business, are more likely to fail again and pay less to creditors. The research, commissioned by The Guardian, suggests that these deals, known as "phoenixism," can result in significant losses for taxpayers and creditors.
The study, conducted by Turnstone Intelligence, analyzed over 1,700 administrations and found that pre-packs involving connected parties, such as former directors and shareholders, resulted in a second insolvency in a significant number of cases. In contrast, pre-packs involving unconnected parties led to a subsequent insolvency in a lower percentage of cases.
The research also revealed that connected parties were more likely to be allowed to defer payments in pre-packs, with a significant percentage of such deals permitting future instalments. In these cases, unsecured creditors received a return in a lower percentage of cases, with an average payout of just 1.58p in the pound.
In contrast, pre-packs involving unconnected parties resulted in repayments to creditors in a higher percentage of cases, with an average payout of 7.86p in the pound.
The findings are consistent with previous studies, including a report by the University of Wolverhampton and a 2018 EU-funded study. These studies also highlighted the risks of connected-party pre-packs, which can allow non-viable businesses to shed their liabilities and continue trading.
The study's results have sparked concerns about the impact of phoenixism on taxpayers and creditors. HM Revenue and Customs estimates that the practice costs taxpayers hundreds of millions of pounds each year.
