Senior TC issues draft guidance on fronting and phoenixing

Operators ‘fronting’ (using a reputable person or company to allow one which has lost its repute to continue in business) or ‘phoenixing’ to avoid previous liabilities are likely to be regarded as having lost their repute, according to draft statutory guidance issued for consultation by senior traffic commissioner Beverley Bell.

“Fronting, where a person, partnership or company, which does not have an operator’s licence, uses the operator’s licence held by another entity to conceal the fact that they are behaving in a way which requires them to have an operator’s licence of their own, is considered to be serious. Fronting deprives the traffic commissioner of the opportunity to oversee an operator,” writes Bell.

“Fronting is aggravated and very much more serious where it is apparent that the entity hiding behind the legitimate front would be unlikely to obtain or would be debarred from holding their own operator’s licence. The Upper Tribunal has given clear guidance that evidence of fronting can, on its own, provide justification for deciding that the operator being used as a front has lost its good repute.

“A history of involvement with dissolved companies without any evidence of actual wrongdoing will not of itself amount to a loss of repute. However the use of phoenix arrangements to avoid previous liabilities may amount to unacceptable business practice.

“A phoenix company is where the assets of one limited company are moved to another legal entity (sometimes referred to as a pre-pack) but with no obligation to pay the failed companies debts. Commissioners will scrutinise such applications carefully to ensure the promotion of the principle of fair competition.

“Members of staff acting on behalf of individual traffic commissioners should scrutinise any application carefully to find out why the previous company failed and to ensure that directors are not serial abusers of the phoenix company arrangements. They might for instance search the information available from Companies House and/or seek to obtain a status report from a credit ratings agency.

“The official receiver or insolvency practitioner has a duty to investigate the affairs of companies in compulsory liquidation and to report evidence of criminal offences to a prosecuting agency. Staff should attempt to obtain a copy of the relevant report and must refer it to the traffic commissioner where they have concerns about the application.

“In all cases of a previous liquidation, whilst an applicant might be able to provide evidence which meets the requirements, the report of the liquidator to the creditors must be requested. The contents may also be relevant to the consideration of fitness or repute.”

Bell also provided guidance on the issue of financial standing.

“For standard licences the Upper Tribunal has indicated that whilst money may be ring-fenced for use for maintenance and there may be evidence of maintenance standards that there must be other money available to ensure the remaining aspects of the establishment and proper administration of the business.

“As an operator is not required to have the specified amount available, 365 days per year, throughout every year that the licence is in existence, the key test is whether the applicant or operator has available capital and reserves of an amount equal to the sum specified. Available is defined as: ‘capable of being used, at one’s disposal, within one’s reach, obtainable or easy to get’.

“The leading case poses three questions: How much money can the operator find if the need arises? How quickly can he find it? Where will it come from?”

Bell states that financial resources must be at the disposal of or within the reach of the operator, so if the operator must first ask someone else to transfer the money then it is not available. If the operator is relying upon assets to prove financial standing, then the assets must be items which can be readily sold without any adverse effect on the ability of the business to generate money, should it be needed, and evidence both of their value, and the lack of impact that their disposal would have on the health of the business must be shown.

“The requirement will not be satisfied by showing that on a particular day or during a particular month enough money was available. Instead what is needed is evidence that established operators are consistently able to have enough money available for the requirement to be satisfied.

“The Upper Tribunal has approved the practice of requesting statements covering a period of time, namely three months for existing licences. Bank statements or equivalent should be up-to-date when submitted. A traffic commissioner is justified in rejecting summaries or highlights.

“Whilst the assessment of financial standing has to be made at the time of a hearing the requirement is not limited to that day. Financial resources must be sufficient to ensure the requirement for financial standing with the need for continuing availability.

“Traffic commissioners accept that the amount of money available may fluctuate and therefore will ask existing operators to provide financial evidence covering a period, normally of three months, and then consider the average figure over the whole period. Attempts to persuade the Upper Tribunal to adopt a different approach have failed.

“It is a fundamental principle of company law that every company is a separate legal entity. If a company is part of a Group the company which holds the licence must not only operate the vehicles but also be able to demonstrate that it is of the appropriate financial standing. The traffic commissioner will have to be satisfied as to the detail of any Group guarantee. The more complicated the company structure and/or financial arrangements the greater the care which will be needed to demonstrate that the applicant company does have the money readily available to meet the requirement to be of appropriate financial standing.

“If it is a new business and thus does not have sufficient statements an opening balance meeting the requirement can be accepted, but the licence must be made subject to a finance condition which must be reviewed after the grant of the licence in accordance with Annex 5.”

The sums required have actually fallen for 2013, thanks to the recovery of the pound against the euro (the actual sum required is first calculated in euros, then converted to sterling).

For a standard licence for either trucks or PCVs, the figures are £7,200 for the first vehicle, and £4,000 for each additional vehicle. For a restricted licence, the sums are £3,100 for a first vehicle, and £1,700 for each additional vehicle.