A recent study examining insolvency cases in England and Wales highlights increased risks and poorer outcomes for creditors when insolvent businesses are reacquired by their former owners through pre-pack administration deals, a practice commonly referred to as “phoenixism.” These transactions allow previous management to buy back a company’s assets immediately after liquidation, often leaving unsecured creditors and taxpayers facing significant losses.
The research, conducted by Turnstone Intelligence using artificial intelligence to analyze administrative filings from 2019, reviewed over 1,700 insolvency cases. It found that 44% of pre-pack deals involving connected parties—such as former directors or shareholders—resulted in a second insolvency within seven years, compared to 26% when the buyer had no prior connection to the failed entity.
Ben Sims, managing director of Turnstone Intelligence, noted the substantial gap in outcomes between connected and unconnected buyers. The study also revealed that connected-party transactions frequently allowed deferred payment arrangements, with 65% of such administrations permitting former owners to reacquire assets via installment payments, compared to 28% of unconnected-party deals. These arrangements intensified losses for unsecured creditors, who received a return in only 23% of connected-party deferred-payment cases, with dismal payouts averaging 1.58p on the pound. By contrast, unconnected buyers repaid creditors in 36% of cases, at a higher rate of 7.86p per pound.
The findings echo previous research, including a 2014 government-commissioned report and a 2018 European Union-funded study, both of which identified similar concerns regarding the viability and creditor impact of connected-party pre-packs. Riz Mokal, honorary law professor at University College London and co-author of the EU study, said the current results reaffirm worries that connected-party pre-packs can enable “zombie” businesses—those that shed unsecured liabilities yet continue to operate—thereby undermining creditors and fair competition.
Phoenixism remains legal, and its advocates argue that experienced former directors are often better positioned to rescue troubled companies and maximize creditor returns than new owners. However, the research highlights a persistent tension between these potential benefits and the financial harm associated with repeated insolvencies and low creditor recoveries.
The insolvency trade body R3 responded by emphasizing that the study’s data predates reforms implemented in 2021, which introduced stricter oversight of connected-party pre-pack sales, including the requirement for independent evaluators to approve transactions. Caroline Sumner, R3’s chief executive, underscored that connected-party pre-packs are subject to professional and statutory obligations designed to achieve the best outcomes for all creditors. She differentiated these transactions from broader phoenixism concerns, noting that the latter often involves companies using new entities to evade liabilities while continuing to trade.
This latest analysis contributes to ongoing debates over the fairness and efficacy of pre-pack administrations, particularly regarding their impact on unsecured creditors and public revenue, with tax authorities estimating that phoenixism costs taxpayers hundreds of millions of pounds annually.