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Three companies wound up for abusing the insolvency regime

February 19 2013

Three connected companies have been wound up by the High Court, on grounds of public interest for abusing the insolvency regime by facilitating phoenix trading.

The companies, Adam Smith Business Development Limited (‘ASBD’), Company Corporate Transfer Limited (‘CCT Ltd’) and Genesys 2000 Limited (‘Genesys’) acted together through a service called ‘Corporate Company Transfer’ (‘CCT’), to mislead directors of insolvent companies and their creditors. The orders follow investigations by Company Investigations of The Insolvency Service.

Directors of insolvent companies were misled into believing they could, through CCT, limit their civil and criminal liability by appointing new directors to take over the troubled company. These new directors would arrange for the sale of the company at a substantially reduced price to a new company, set up and controlled by the former directors of the insolvent company. This would allow the old company to go into company voluntary liquidation with limited or no assets, leaving the creditors without any chance of recovering what they were owed.

The investigation revealed that the process whereby the assets were valued and sold to the new company was flawed and deliberately manipulated to put it outside the safeguards of the statutory insolvency regime. In some cases, the sale of the value of a company’s assets had been agreed before an independent valuation had been carried out. Almost invariably, the assets were sold for an amount that would exclusively cover the fees charged by the CCT service and a subsequent liquidation.

In addition, ASBD was paid ‘marketing fees’ by insolvency practitioners for the introduction of insolvency work contrary to the Insolvency Code of Ethics, further calling into question the integrity of the CCT process.

In winding up the three companies, the court found that the CCT service led to undesirable ‘pheonix’ trading, whereby a new company is allowed to take over an existing business, leaving the creditors without redress. Moreover, the service promoted the interests of directors at the expense of the insolvent company’s creditors.

Furthermore, the court relied three points that caused harm to the public. Firstly the fact that the former directors were allowed to remain in control of the company’s bank accounts resulting on occasions in the dissipation of cash that could have available to creditors. Secondly, there were doubts as to the integrity of the asset valuations, as they were conducted in ways that were not independent. Finally, there was no investigation of the insolvent company’s accounting records to discover undisclosed assets such as work in progress or goodwill.

Graham Home, the Deputy Chief Executive of The Insolvency Service stated that directors should be aware that there is no escaping their responsibilities and they will have to settle debts with their creditors. He went onto highlight that the service will liaise with the professional regulators of any authorised persons that are found to be involved in such schemes and will find any company that is tempted to abuse the insolvency regime.

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