An Office of Fair Trading (OFT) probe into corporate insolvencies must address the problem of ‘phoenix’ companies leaving small businesses unpaid after becoming insolvent, according to the Forum of Private Business (FPB).

A phoenix company exists where the assets of one limited company facing liquidation are transferred to another business. Often, some or all of the directors remain and the new business frequently operates in the same area as the former company.

It is legal to form a new business from the remnants of a failed company. However, unsecured creditors, in particular, rarely receive adequate recompense and company directors are able to transfer the assets of a failing company at less than the market value before the insolvency process begins, reducing the funds available to creditors.

The FPB urges that the OFT investigates the high cost of closing a business and UK creditors’ general rates of recovery and also focus on phoenix companies and directors who abuse the process.

Matt Goodman, the FPB’s policy representative, says: “Though it may be too late to help those small businesses who have been hardest hit by phoenix practices in this recession, surely we can use this review to help isolate and correct the problem?”