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Phoenix companies – what about the consumer?

Consumer law solicitor Zahra Nanji discusses the legal issues arising for consumers who are treated by private healthcare businesses that then ‘phoenix’ after closing down.

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Zahra represents people who have been seriously injured and who have turned to her for her technical expertise and approachable manner. She has a special interest in complex and catastrophic injuries, including those caused by medical devices.
During the current pandemic is seems inevitable that many businesses will sadly have to close. However, for some of those businesses, there may be a second chance to re-emerge as a so called ‘phoenix company’, a process named after the mythical bird of fire which rises from the ashes and comes back to life once more.
 
Although phoenixing can mean that a business can keep trading, retaining its brand and identity which is a positive outcome for the business and its employees, there can be a significant negative impact on creditors and consumers, leaving them out of pocket when a company folds and without the ability to seek recompense.  In the context of my work I see this impact particularly in relation to customers of private healthcare clinics.
 
In the world of private health care and cosmetic surgery in particular, 'phoenixing' is a relatively frequent occurrence.  A business will sell-off or transfer its assets, commonly below market value or for nothing, often to the same company directors as long as the individuals involved are not personally bankrupt. The business is re-started under the guise of a new legal entity. In the majority of cases there is a pre-packaged sale of the assets and goodwill, known as a ‘pre-pack’ because the sale of the assets has been pre-arranged with the company’s directors.
 
After closing the old company, a new company is registered but it uses the same trading name and continues to operate the business in exactly the same way as the old company.  This can give the consumer the misleading impression that it is ‘business as usual’. However, the key consequence of phoenixing is that the business trades as a new corporate entity with a completely clean slate with none of the liabilities of the old company.
 
In the context of cosmetic surgery well-known clinics such as Transform, The Hospital Group and Harley Medical Group have all historically phoenixed their businesses, with Harley Medical Group phoenixing in 2012 following the PIP breast implant scandal and again in 2019 when it was acquired by Skin, a private equity-backed chain of  clinics sold as a pre-pack, following reports of a large future VAT bill.  Transform also underwent pre-pack administration in 2019 when Combine Opco and TFHC, who operated 30 clinics and hospitals across the UK, had acquired debts of £6.5m between them including £600,000 of unpaid tax. The two companies became a single legal entity and continue to trade as Transform.
 
Whilst acting for women who have been diagnosed with BIA-ALCL, a rare cancer linked to textured breast implants, many have been surprised to learn that the cosmetic surgery clinics with whom they had their implantation surgeries no longer legally exist or they do not have historical insurance in place to cover their liabilities, leaving  patients and creditors unable to pursue the clinics when things go wrong.   
 
Patients who are considering cosmetic surgery may want to ask the following key questions to help protect themselves if anything goes wrong in the future:
  1. Do both the clinic and the surgeon have appropriate insurance cover, ideally get this confirmed in writing with specific policy numbers;
  2. Who has legal responsibility and legal liability for their surgeries and any products implanted, is it the surgeon, or is it the clinic, again ask for written confirmation of this;
  3. Wherever possible pay by credit card – as this will provide a further layer of protection in the event that the procedure goes wrong.
The legacy of cosmetic and private clinics that have phoenixed is that many women are forced to seek medical assistance from the NHS. Unlike with private health sector clinics, the NHS is subject to laws which requires it to meet its liabilities when it is responsible for an injury to a patient.
 
From a legal point of view it is important to bear in mind the different regulatory landscape in which private health care providers are permitted to operate in the UK, in contrast to regulations that cover the NHS.  In a time when there is so much pressure on the NHS, going forward questions will need to be asked about the burdens which are put upon it from private medical providers who phoenix.
 
It is unlikely that the overburdened NHS, and patients treated by the poorly-regulated private sector, will have the same ability to rise from the ashes.

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