How on earth is this legal?

Company A goes into administration. Almost no liquid or physical assets, and owing £750k to creditors, of which >£500k is to HMRC in respect of unpaid VAT and PAYE taxes. Company A’s Directors and majority shareholders are a mother and daughter.

The administrators run a pre-pack process, in which selected assets of Company A (IP, Work in progress, and office equipment) is sold to Company B, for £80k.

Company B:
- Is newly incorporated (incorporated about a month before administrators were appointed for Company A)
- Has a very similar name, and the same address as company A
- Has the same mother and daughter directors and majority shareholders as company A

Can the directors of company A simply walk away from the debts, and carry on afresh with the work now assumed under company B?

I get the concept of limited liability, but if I was a creditor in this situation I’d be pretty pissed off.
(I am not a creditor, but I vaguely know the individuals involved)

Sounds about right, unless there's clearly been fraud or a clear case of insolvant trading.

Look at it this way:

The "debt" to HMRC is not a commerical debt, it's unpaid taxes on trading and employment that HMRC would never have received anyway if company A had been wound up months ago, so in reality they've lost nothing.

The remaining debt of £250k will sting the creditors, but any business advancing significant amounts to a small family run company needs to do their due diligence and ensure they are comfortable if the risk. If they didn't do that, then they're adults and have just learned a very expensive lesson. If they did, then it's a business cost.

And in the future, no-one in their right mind is going to advance the phoenix company any significant money, work for them or possibly even trade with it, so the business guru mother and daughter team will get what's coming to them.

It's possible to defer PAYE and VAT payments for up to a year pretty easily, especially since Covid hit. It was routine for many businesses to do that even if they weren't distressed as it was essentially an unsecured interest free loan.

And yes, salaries were probably paid out of taxes owed, but again, who really loses in that situation? People were employed for longer than they would have been otherwise and all the government loses out on is a bit of tax owed, so no "real" cash cost as they wouldn't have got those taxes anyway.

As for the creditors, well you would have looked into the company before loaning or advancing it any significant money and ensured you had security if they failed to pay, wouldn't you...?

I’ve seen a supplier supply company B on a cash on delivery basis after company A went bust on them.
Their philosophy was that profits made on continued sales to company B would eventually cover the losses made from company A.

Not sure why the tax payer should lose out?

It doesn't lose out.

If HMRC wound up the company on day 1, it wouldn't get any taxes from days 2 to 365.

If HMRC give a year's holiday on taxes and the company doesn't pay, it still doesn't get any taxes on days 2 to 365.

Deferrment of taxes owed are not the same thing as a cash loan, or even credit on supplies.

HMRC are not getting money that was owed to them. Clearly they are losing out, which of course means we are all losing out. The idea that the only option left to the firm was to defer tax payments until insolvency doesn't seem likely. Reducing costs by shedding a few staff might well have been an option. Another issue is that this company was competing unfairly with its competitors. The competitors were paying tax, this firm wasn't.

And this is where human intuition falls down.

Taxes owed are not "money". It's a notional figure calculated on profits that never really existed.

It's like me writing you an IOU for a billion quid payable in a year's time. It doesn't instantly make you a billionaire and when I fail to pay, you haven't actually lost a billion quid!

As for unfair competition, perhaps, but then they couldn't even compete without paying taxes so it couldn't have been that much of an advantage and that situation can only go on for around a year normally.

This is the nub of it. I find it really hard to believe that the directors didn’t take any salary in the period the debt to HMRC was run up (given that period is likely to have been 6-9 months+). The net result is that the directors have managed to treat themselves as preferential creditors to HMRC (their salaries got paid, HMRC didn’t).

This is where the line on insolvent trading becomes really difficult.
A very play-it-safe position might have been “liquidity looks a little tight, let’s suspend director salaries for a few months and keep a bigger cash buffer, we can always pay it back when our customers pay their bills”.

But if you can phoenix the company, there seems to be little incentive to take that route - so long as you can reasonably justify that you believed you can pay debts as they fall due then you’re better to keep extracting as much money as you can, because the creditors will wear the loss if it doesn’t work out.

What sticks even more is that in this case most of the consideration for the acquisition of the assets hasn’t even been paid; the new entity have agreed a payment plan with the administrators whereby 30% is paid up front and the remaining 70% is paid in monthly instalments over 2 years. What’s to stop the directors from doing the same again, with these monthly payments being another debt that doesn’t get paid?

so you can just run a profitable and healthy company, take a salary maybe even pay dividends, never pay tax and just plan for the outset to phenix every years?

Doesn’t sound like HMRC is not losing out to me?