November 12 2009.

A probe into corporate insolvencies must address the problem of 'phoenix' companies starting again under a different name leaving their smaller creditors unpaid, the Forum of Private Business (FPB) is arguing.

The Office of Fair Trading (OFT) has today launched an investigation into the corporate insolvency market amid concerns that the cost of entering administration is too high compared to other countries. Insolvency practitioners' steep fees will be included in the investigation. The FPB has been called to provide submissions to the inquiry.

In addition to investigating the high cost of closing a business and UK creditors' general rates of recovery, the FPB believes that the inquiry must also focus specifically on phoenix companies and directors who abuse the process.

"When a business drops out of the market, banks and the Government take their cut but what about the small business which has supplied that company and has never been paid?" asked Matt Goodman, the FPB's Policy Representative. "Or, if a competitor wipes the slate clean of debts and carries on trading, where does that leave those small businesses struggling with their own finances?"

"Though it may be too late to help those small businesses who have been hardest hit by phoenix practices in this recession, surely we can use this review to help isolate and correct the problem?"

A phoenix company exists where the assets of one limited company facing liquidation are moved to another business. Often, some or all of the directors remain and the new business frequently operates in the same area as its predecessor.

It is legal to form a new business from the remnants of a failed company. However, unsecured creditors, in particular, rarely receive adequate recompense and company directors are able to transfer the assets of a failing company at less than the market value before the insolvency process begins, reducing the funds available to creditors.

In a recent survey carried out by the FPB, cash flow worries as a result of payment problems were voted as the number one concern of the FPB members surveyed. In all, almost a quarter of respondents (23%) cited the issue as their biggest headache - more than a lack of sales, complying with health and safety regulations and even restrictions in credit.

In all, 42% of FPB members who took part in the survey reported a deterioration in payments, including failed payments arising from debtors becoming insolvent.

The situation is likely to become worse. According to the Insolvency Service, there have been 4,716 compulsory liquidations and creditors' voluntary liquidations in the third quarter of 2009, an increase of nearly 15% compared to the same period a year ago.

Coinciding with the OFT's investigation, an Early Day Motion (EDM) calling on the Government to carry out a review of the UK's insolvency laws in order to protect unsecured creditors has now been signed by more than 30 MPs.

One of them, Dai Davies, the Independent MP for Blaenau Gwent in south Wales, said problems associated with phoenix companies are adding to employment woes.

"Constituencies like mine, which have seen a huge decline in traditional jobs such as manufacturing, coal and steel, increasingly rely on family businesses and smaller employers, particularly those providing work for10-15 people," said Mr Davies, speaking to the FPB.

"These companies need cash flow yet here we have bigger businesses abusing them, in my opinion, by building up debts then changing their names overnight and starting again. The liquidation process means the taxman gets most of the money and smaller creditors are left with nothing.

"This is an area in which we've seen a lot of problems recently. I want the Government to investigate it. Without doubt the issues surrounding phoenix companies must be addressed in order to help these SMEs survive and grow."

Another, Mike Hancock, the MP for Portsmouth South told the FPB: "The Better Payment Practice Campaign found that a quarter of companies have fallen foul of 'phoenix companies'. Obviously, smaller businesses in particular need to get all the money that is owed to them and even one default can make the difference between an otherwise well-run company going bust or continuing in business."

An FPB member for 20 years, Tom Thwaites, of Thwaites Services Ltd, an industrial engineering firm in Cumbria, said he is "trying to swim uphill with lead weights on [his] feet."

"I think it time [for you] to tackle one of the biggest issues facing us all, especially in the present climate, which is that of companies folding and leaving gaping holes financially for others to somehow repair," said Mr Thwaites. "Why is it that the Government, followed by the tax man and then the banks, get their crack of the whip leaving the rest of use to pick up the pieces?

"Surely everyone should get an equal percentage of what ever the receiver collects - then they would maybe try a little harder to secure better returns. I agree that the ex-workforce should have priority but the rest should receive a dividend.

"It's even worse when you've just delivered a consignment to be told a day or two later that you can't even have it returned!"