I. Introduction – Rising Phoenix Companies in India
When a new company rises from the ashes of an unsuccessful predecessor with the same controllers and operations, this activity is called phoenixing of companies[1]. The same directors and shareholders who were involved in the failed version of the company participate in the phoenix process, and they are permitted to continue operating under the same name as long as they adhere to the rules[2]. While this is well known in Australia and the United Kingdom, but relatively this is novice in India. While this may seem like a legitimate rescue strategy but it also raises concern in evading liability, unpaid tax authorities, leaving creditors etc[3]. In many countries like the United Kingdom, phoenixing is an acute crime with harsh consequences when found guilty[4]. In India there is no such comprehensive legislation that talks about the validity of Phoenix companies, nevertheless, Section 74 of the Companies Act 2013[5], and Section 29A of the Insolvency and Bankruptcy Code 2016 make Phoenix companies illegal under fraudulent intention or abuse of law[6].
II. UK Laws on Phoenix Companies
A director, or a shadow director is prohibited under section 216 of the Insolvency Act, 1986 to re-use the same name previously used by the company that has gone into liquidation[7]. Breaching this law is a criminal offence under section 217 where the penalties can be fine or imprisonment[8]. The purpose of this legislation is to stop ‘phoenixism’ where directors will be able to liquidate the company as well as avoid paying to creditors, before starting a new company with same or similar name or line of business[9]. Apart from this, section 6 of Companies Director Disqualification Act, 1986[10] states that a Director can be disqualified for a period of two to fifteen years if they are engaged in ‘unfit conduct’ in managing insolvent company, and this also involves phoenixing of companies[11]. The Fraud Act of 2006[12] is also a picemeal legislation which in certain cases also cover phoenixing of companies by Directors that involve fraud, misrepresentation, abuse of position and concealment of information[13].
III. Australian Laws on Phoenix Companies
Australia has one of the most developed and comprehensive commercial laws in regulating illegal phoenix activities[14]. The primary legislation governing is Corporations Act 2001[15]. Section 596AB of the act, imposes criminal liability on a person who enters into a transaction with an intention to avoid recovery of entitlements of employees as well as of the company, or significantly reduce the entitlements of employees and the company[16]. In addition to criminal penalties, under section 596AC the person may also be liable to civil pecuniary liability[17]. This legislation comprehensively deals with illegal phoenixing of companies[18]. Treasury Laws Amendment (Combating Illegal Phoenixing) Bill, 2019[19] that amends Corporation Act 2001 to introduce civil and criminal penalties under section 588FDB[20]. This provision combats illegal phoenixing and under these laws, directors and facilitators who engage in ‘creditor defeating disposition’ can face civil and criminal penalties[21]. This collectively enhance director accountability and protect creditors from fraudulent practices[22]. Apart from this section 203AA and 203AB puts restriction on resignation of director unless company is being wound up as well as imposes personal liability on directors for unpaid creditors amount[23]. The Director Identification Number (DIN) prevents use of fictious identities of the director and aids in detecting illegal phoenixing of companies[24]. Australian securities and Investment Commission (ASIC) conducts surveillance and monitor individuals suspected of engaging in illegal phoenix activities[25]. It collaborates with government agencies like, Australian Taxation Office (ATO) to detect and deter illegal phoenixing activities[26].
IV. Indian Approach to Phoenix Companies: Legal Framework and Challenges
1. Essar Group – Controversy
The Essar Group controversy is part of a bigger problem, that has hamstrung the corporate world[27]. Loan defaults and Non-Performing Assets (NPA) is a daunting issue in India. In 2017, Essar Steel went into Insolvency proceedings, and during its insolvency proceedings, it tried to buy-back its assets by forming another Phoenix company[28]. This incident smouldered a huge debate – Should buying – back your company’s assets be allowed to evade insolvency? Essar Steel’s management put itself into resolution or liquidation, solely to buy the same company and form a phoenix company, shorn of the debts of their original company[29]. In backdrop of this controversy, in 2018 section 29A was inserted in the Insolvency and Bankruptcy Code, 2016[30].
2. Legal Framework
Section 29A bars a company from submitting a resolution plan for liquidation, whose company has been legally classified as an NPA and further has failed to repay within one year of that classification[31]. The company shall be entitled to submit a resolution plan when all the overdue accounts have been cleared before the submission[32]. In cases where the company’s Promoters give a personal guarantee to the creditors for the company’s debts, Section 29A will ex-ante exclude such promoters from phoenixing[33]. Apart from this, section 35(1)(f) of the IBC, 2016 prohibits the liquidator from selling the assets of corporate debtor to any person liable under section 29A[34]. This ensures that defaulting promoters cannot repurchase assets at discounted rates during liquidation[35]. In a reportable case, ArcelorMittal India Private Limited v. Satish Kumar Gupta[36] the supreme court gave interpretation of section 29A. The court emphasised on the importance of in preventing defaulting promoters from regaining control of their companies, thereby upholding the integrity of insolvency process[37]. In this case, the court adopted a purposive approach in interpretating ‘controller’ and ‘promoter’ to include both de jure and de facto control[38]. This purposes to prevent individuals who have significant influence over a company, who doesn’t have any formal titles to circumvent disqualification provision[39]. This provision also ensures that in cases where individuals hide behind complex corporate mechanisms, the corporate veil can be lifted[40].
3. Conclusion
The entire concept of phoenixing of companies embodies a practice of resuscitating failed enterprises, its misuse will not only jeopardize the financial and legal system but also put the creditors in significant risk. Section 29A of the IBC 2016 was a prominent regulatory framework that is crucial to curb fraudulent and malicious phoenixing, yet it is not comprehensive enough to tackle it. Several loopholes still exist and they must be addressed on a priority basis with a robust and transparent mechanism such as a tailor-made pre-pack pool. This mechanism must incorporate enhanced scrutiny of transactions, strict enclosure norms to ensure accountability, and extended oversight of post-insolvency operations. The UK and the Australian legislations can be used as a model for drafting this pre-emptive mechanism. Developing a comprehensive regulatory framework that addresses this daunting issue, will balance entrepreneurial revival with creditor protection. With this, India can pave the way for an equitable and efficient insolvency regime, that safeguards the economic and legal welfare.
Refrences
[1] Patrik Dutta and Suharsh Sinha, ‘Promoter buy-back in insolvency: ‘Phoenixing’ in India’, (2017), Oxford Business Law Blogs, https://blogs.law.ox.ac.uk/business-law-blog/blog/2017/12/promoter-buy-back-insolvency-phoenixing-india#:~:text=Essar’s%20strategy%20was%20akin%20to,government%20to%20effectively%20restrict%20phoenixing., last accessed 03/06/25
[2] Ibid
[3] The Hindu, Bussine Line, (2018), https://www.thehindubusinessline.com/companies/promoters-well-positioned-to-get-back-control-of-entities-under-insolvency-experts/article64286010.ece, last accessed 03/06/25
[4] GoCardless, ‘How Does Phoenix Companies Work?’, (2021), https://gocardless.com/guides/posts/how-does-a-phoenix-company-work/, last accessed 03/06/25
[5] Companies Act 2013, s 74
[6] Insolvency and Bankruptcy Code 2016, s 29A
[7] Insolvency Act 1986, s. 216
[8] Insolvency Act 1986, s. 217
[9] Hugh Jessaman, ‘Section 216 – Did you know The Reuse of a Company Name After Liquidation is Prohibited?’, (2025), Anthony Batty & Co., https://www.antonybatty.com/section-216-did-you-know-the-reuse-of-a-company-name-after-liquidation-is-prohibited/, last accessed 03/06/25
[10] Companies Director Disqualification Act 1986, s 06
[11] LexisNexis, ‘What constitutes unfitness under section 6 of the Company Directors Disqualification Act 1986?’, (2022),LexisNexis Restructuring & Insolvency expert, last accessed 03/06/25
[12] The Fraud Act, 2006, (c35) the United Kingdom
[13] Trustpair, ‘The Fraud Act of 2006, and What it Means for Companies?’, (2024), https://trustpair.com/blog/the-fraud-act-2006-and-what-it-means-for-companies/, last accessed 03/06/25
[14] Marino Law, ‘New Corporations Act Penalties Strengthening Protections for Employee Entitlements’, (2019), https://www.marinolaw.com.au/new-corporations-act-penalties-strengthening-protections-for-employee-entitlements/, last accessed 03/06/25
[15] Corporations Act 2001
[16] Corporations Act 2001, s. 596AB
[17] Corporations Act 2001, s. 596AC
[18] Ibid 12
[19] Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, Act 46 of Australia
[20] Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, s 588FDB
[21] ibid
[22] Mustafa-AY and David Grant, ‘Phoenix rising: Update on illegal phoenixing legislation’,(2023), Law Society Journal, https://lsj.com.au/articles/phoenix-rising-update-on-illegal-phoenixing-legislation/, last accessed 03/06/25
[23] Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, s 203AA and 203AB
[24] Matthew King, ‘New Director Identification Numbers to tackle illegal phoenixing’, (2021), William Buck, https://williambuck.com/news/business/general/new-director-identification-numbers-to-tackle-illegal-phoenixing/, last accessed 03/06/25
[25] ASCI, ’Illegal Phoenix Activity’, (2023) https://asic.gov.au/for-business/small-business/closing-a-small-business/illegal-phoenix-activity/, last accessed 03/06/25
[26] ibid
[27] Knowledge at Wharton, Insolvency in India: Why Essar Group Is Digging Deep for Funds,(2017), https://knowledge.wharton.upenn.edu/article/insolvency-india-essar-group-others-digging-deep-funds/, last accessed 03/06/25
[28] Ibid 03
[29] Ibid 25
[30] Insolvency and Bankruptcy Code 2016, s 29A
[31] Ibid 28
[32] India Financial Consultancy, ‘What is ineligibility criteria U/s 29A of IBC Code’, (2025), https://www.caindelhiindia.com/blog/ineligibility-criteria-u-s-29a/, last accessed 03/06/25
[33] IBC Law Reporter, https://ibclawreporter.in/ibc-sections/section-29/, last accessed 03/06/25
[34] Insolvency and Bankruptcy Code 2016, s 35(1)(f)
[35] IBC Laws, https://ibclaw.in/section-35-powers-and-duties-of-liquidator/, last accessed 03/06/25
[36] ArcelorMittal India Private Limited v. Satish Kumar Gupta, Appeal no. 9420/2018
[37] Argus Partners,’ ArcelorMittal India Private Limited v. Satish Kumar Gupta, Appeal no. 9420/2018’, (2018) https://www.argus-p.com/updates/updates/arcelormittal-india-private-limited-v-satish-kumar-gupta-civil-appeal-nos9402-9405-2018/ last accessed 03/06/25
[38] Ibid
[39] Vaish Associates Advocates, ‘Between the Lines’, (2018), Manupatra, https://www.manupatrafast.com/NewsletterArchives/listing/Tax%20Alert%20Vaish/2018/November%202018/Between%20the%20Lines%20November%202018.pdf, last accessed 03/06/25
[40] Ibid
****
Author: Ridhi Shree Nair and Arjun Pandey are fourth year students of Dharmashastra National Law University, Jabalpur
