Bust companies revived in ‘phoenix’ deals more likely to fail again, study finds
Businesses revived through 'phoenix' deals are significantly more likely to fail again and repay far less to creditors, according to new research.
Insolvent businesses reacquired by their previous management in 'pre-pack' administrations are much more likely to fail again and tend to repay far less to creditors, research for the Guardian suggests. The study is the latest to raise questions about the practice of 'phoenixism' – accounting's controversial art of liquidating companies to allow directors to return with a new entity, free of debts.
The process tends to involve pre-pack administrations, where a supposed corporate rescue is agreed before commencing insolvency proceedings. These orchestrated deals often leave unsecured creditors nursing large losses. HM Revenue and Customs estimates that phoenixisms cost taxpayers hundreds of millions of pounds a year.
Cases have included owners extracting millions of pounds in dividends and loans from businesses they subsequently arrange to buy back from administrators. The study was commissioned by the Guardian from Turnstone Intelligence, which used AI agents to read official documents relating to more than 1,700 administrations during 2019.
Higher failure rates
The research company noted much poorer outcomes when a business's assets were reacquired by 'connected parties', such as former directors and shareholders. It found that 44% of pre-packs had resulted in a second insolvency by July 2026 when assets were bought by a connected party. Just 26% of pre-packs produced a subsequent insolvency when the acquirer was unconnected to the failed company.
I was surprised how big the gap remains. These results support what many in the industry have long suspected and will feed the continuing debate as to whether saving these businesses is worth the impact on taxpayers and creditors.
Creditor losses
The data showed that connected parties appeared far more likely to be permitted to defer payments in pre-packs. A total of 198 out of 303 connected-party administrations – 65% – allowed former owners and directors to reacquire the assets via future instalments. For unconnected pre-packs, 28% of buyers used deferred payments.
Unsecured creditors, who typically include HMRC, received a return in only 23% of pre-packs involving a connected party deferring payments, with those deals paying out just 1.58p in the pound. When the buyer was unconnected, 36% of pre-pack administrations resulted in repayments to those creditors, at a rate of 7.86p in the pound.
Industry response
The findings appear to closely mirror results from two well-known reports in the field: research by the University of Wolverhampton for the government in 2014 (Graham review) and a European Union-funded 2018 study. Both pointed to poorer outcomes in connected pre-pack administrations. Those issues were compounded when the assets were reacquired by connected parties through deferred payments.
These are striking findings and are consistent with our earlier work. They reinforce a wider concern that connected-party pre-packs can allow non-viable 'zombie' businesses to shed their unsecured liabilities and continue trading, harming not only their creditors, including HMRC, but also competitors that continue to pay their way.
R3, an insolvency industry body, said the research looked only at cases that predated 2021 rules that 'increased scrutiny of connected-party pre-pack sales and introduced additional safeguards and transparency requirements'. Caroline Sumner, chief executive of R3, defended the process as legitimate and regulated, while distinguishing between phoenix activity and connected-party pre-pack administrations.
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