Bust companies revived in ‘phoenix’ deals more likely to fail again, study finds

Exclusive: research for the Guardian shows ‘pre-pack’ deals with former management also pay far less to creditors

The boss whose twice-bust business appears to be back

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. 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.

Ben Sims, managing director of Turnstone Intelligence, said: “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.”

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.

“What was interesting to us was the sheer scale of losses,” Sims said. “You would hope these deals would provide better outcomes to creditors, but we see them getting almost nothing. Of course, the biggest loser is often the taxpayer.”

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.

Riz Mokal, an honorary law professor at University College London who co-authored the EU study, said: “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.”

The methodology used by the latest researchers was broadly consistent with the earlier, EU-funded study. They used AI agents to read filings submitted over the past seven years for administrations commenced in England and Wales in 2019 – which Turnstone said was “long enough for creditor returns to settle and buyer failures to show”.

The sweep of insolvency filings identified 544 pre-pack sales in 1,738 administrations during 2019, with the study’s numbers checked by other computer models and verified by humans.

Phoenixism is legal and its defenders say the practice can deliver better returns for creditors, with experienced directors sometimes better-placed than newcomers to salvage a failed company.

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”. These included requiring independent evaluators to clear sales to connected parties.

Caroline Sumner, chief executive of R3, said: “A connected-party pre-pack administration sale is a legitimate and regulated insolvency process overseen by licensed insolvency practitioners and subject to extensive professional and statutory requirements. The duties of an administrator in a pre-pack administration sale are to achieve the best outcome for creditors of the company overall.

“It’s important to distinguish between phoenix activity and connected-party pre-pack administrations. Concerns about phoenixism generally relate to businesses seeking to avoid liabilities while continuing to trade through a new entity.”