When a company enters insolvent liquidation, its directors may wish to carry on the underlying business through a new vehicle, sometimes trading under the same or a familiar name.
This can be entirely legitimate, but section 216 of the Insolvency Act 1986 strictly controls the re-use of the name of a failed company.
Breaching it is a criminal offence, and it can make a director personally liable for the debts of the new business.
Who is caught?
Section 216 applies to any person who was a director or shadow director of a company at any time in the 12 months ending with the day before it went into insolvent liquidation.
A company goes into insolvent liquidation if, when it enters liquidation, its assets are insufficient to pay its debts, other liabilities and the expenses of the winding up.
What is a “prohibited name”?
A prohibited name is any name by which the liquidated company was known in that 12-month period, or any name so similar to it as to suggest an association with that company.
Importantly, this covers not only the registered company name but also any trading name under which the company carried on business. Names that differ only slightly, or that keep a distinctive element of the old brand, may therefore still be caught.
What is restricted?
For five years from the date of liquidation, unless the court gives permission or a statutory exception applies, the individual must not:
- Be a director of another company known by a prohibited name;
- Directly or indirectly be concerned or take part in the promotion, formation or management of such a company; or
- Directly or indirectly be concerned or take part in carrying on an unincorporated business under a prohibited name.
The restriction is broad, and it can catch informal or behind-the-scenes involvement as well as formal directorships.
The consequences of breach
Contravening section 216 is a criminal offence punishable by imprisonment, a fine, or both.
In addition, under section 217, a person involved in the management of a company in breach of section 216 is personally responsible, jointly and severally with the company, for the debts the company incurs while they are involved.
The same personal liability extends to anyone involved in management who acts, or is willing to act, on the instructions of a person they know to be in breach. Liability is strict in practice: creditors of the new business may pursue the individual directly, regardless of whether the name was re-used dishonestly.
The statutory exceptions
Part 22 of the Insolvency (England and Wales) Rules 2016 sets out three “excepted cases” in which a director may act without the court’s permission:
Purchase of the business from an insolvency practitioner (Rule 22.4).
Where a successor company acquires the whole, or substantially the whole, of the insolvent company’s business under arrangements made by an insolvency practitioner, the director may give a prescribed notice.
If it is given correctly and on time, the director may act without committing an offence or incurring personal liability for the successor company’s debts.
The notice cannot be given by someone who has already acted in breach of section 216, so timing is critical.
As set out above, timing of the notice is crucial. Whilst it can be provided before arrangements are finalised with the insolvency practitioner to acquire the insolvent business, the latest the notice must be given is no later than 28 days after completion of the acquisition.
The notice has to be advertised in the Gazette and also must be given to every known creditor of the insolvent company.
Prompt application to court (Rule 22.6).
If the director applies to the court for permission within seven business days of the liquidation, they may act temporarily without permission.
This interim protection lasts until six weeks after the liquidation or until the court decides the application, whichever is earlier.
Established companies (Rule 22.7).
Permission is not required where the other company has been known by the name for the whole of the 12 months before the liquidation and was not dormant at any time during that period. This typically protects genuine group or sister companies with an established trading history.
Applying for the court’s permission
Where no exception applies, a director can apply to any court with jurisdiction to wind up companies for permission to act.
The Secretary of State or the Official Receiver may appear on the application and draw relevant matters to the court’s attention and the court may call for a report from the liquidator.
A well-prepared application, supported by evidence about the reasons for the failure of the old company and the proposed arrangements for the new business, is essential.
How we can help
Mackrell advises directors on restrictions concerning the re-use of prohibited company names and seeks court permission where required.
We also defend directors facing personal liability claims and disqualification proceedings and advise insolvency practitioners and creditors on the recovery of debts from those who breach the rules.
Because the deadlines are short and the consequences of getting it wrong are serious, we strongly recommend seeking advice before a company enters liquidation or before any new business begins trading under a similar name. If you would like support from our experienced team, please get in touch.
This article is for general information only and does not constitute legal advice.
