More than a quarter of growing businesses have been adversely affected by dealings with so-called phoenix companies, perfectly legitimate entities that have risen from the ashes of a failed venture – according to a survey from the Better Payments Practice Group (BPPG).

A phoenix company arises when the assets of one limited company are moved to another legal entity. It allows the profitable elements of the failed business to survive, offering some continuity for both suppliers and employees and is usually a perfectly ethical move. However, a minority of unscrupulous directors take advantage of the phoenix arrangement by transferring the assets at less than market value before insolvency, thereby reducing the funds available to creditors when the original company eventually does become insolvent.

’The results of the web poll show that the importance of credit vetting, and only extending credit when you are satisfied that you will be paid in full and on time, cannot be overstated,’ urges Philip King, Director General of the Institute of Credit Management. ‘With a small investment in trade references, or a credit report on the directors themselves, potential creditors of a phoenix company that has been incorporated solely to abuse the system can save themselves time, worry and financial loss.’

In response to the poll, the BPPG has added guidance to its website to explain the legalities of the phoenix arrangement and to help businesses identify legitimate companies and avoid those who abuse the system. This can be found at www.payontime.co.uk/.

See also: Do business credit scores matter? – Credit scores have long been used as a barometer for overall financial health, but two in three SME owners don’t check credit reports, according to Experian research.