Directors commonly wonder if it’s possible to simply start a new company after liquidation and begin again.
While registering a new limited company isn’t forbidden, there are strict rules about how closely it can be related to the one just closed, as I’ll explain below. The laws are in place to prevent the practice of ‘phoenixing‘, which is when a new company with a similar purpose arises from the ashes of the old[1]Trusted Source – GOV.UK – ((Trusted Source – GOV.UK – Phoenix companies and the role of the Insolvency Service.
Can You Start a New Limited Company After Going Through Liquidation?
You can, in principle, form a new company after liquidation; the law does not prevent it. Any director is perfectly allowed to operate multiple businesses simultaneously or sequentially.
However, specific conditions apply, especially if the new company shares a name or closely resembles the identity of the liquidated entity, as I’ll explain.
The Legal Conditions for Setting Up a New Company
The Insolvency Act of 1986, particularly Section 216[2]Trusted Source – .GOV – Insolvency Act 1986, Section 216, outlines the legal conditions for directors setting up a new company after liquidation. For five years from the date of the company’s dissolution, directors cannot:
Use a name that is the same or substantially similar to that of the liquidated company.
Be involved in the formation, promotion, or management of any company with such a name.
Using a trading name similar to the liquidated company that might suggest a continuation of the previous business is not allowed.
These restrictions apply to anyone who was a director of the company in the 12 months preceding its liquidation.
Despite these restrictions, directors can legally proceed with a new company by:
Choosing a distinctly different company name
Obtaining court approval to use a similar name
What are the Exemptions that Allow the Reuse of Company Names after Liquidation?
There are exemptions to the restrictions imposed by Section 216 in the following circumstances:
(1) If the Court Gives Permission: This process, known as applying for court leave, must be initiated within seven days of the company’s liquidation.
(2) If the new business was trading under the contested name for at least 12 months before the liquidation without being dormant, it might be possible to continue using the name.
(3) If a new company acquires the whole, or substantially the whole, of the business of the insolvent company from the insolvency practitioner, it may be able to use a prohibited name if:
Notice of the intention to use the name is given to all creditors of the insolvent company within 28 days of acquiring the business.
The notice is published in the Gazette within the same 28-day period.
(3) Directors may have the opportunity to buy the name of their liquidated company from the liquidator at fair market value.
(4) If the company using the prohibited name has been dormant (not trading) for at least 12 months prior to the liquidation of the insolvent company, it may be exempt.
(5) In some cases, if the new company is or has been a wholly-owned subsidiary of the insolvent company, it may be exempt from the naming restrictions.
What are the Consequences of Violating Section 216 Restrictions?
Section 216(3) of the Insolvency Act 1986 clearly states the consequences for violating the restrictions on reusing company names after liquidation: “If a person acts in contravention of this section, he is liable to imprisonment or a fine, or both.”
Key Considerations When Starting a New Company After Insolvency
HMRC May Insist on a Security Deposit: If the old company owed HMRC significant tax debts, they may require a deposit or security bond when setting up a new company. This serves as protection against perceived risks from previous defaults, with the amount based on the prior debt.
Sale of Assets at Correct Value: Assets must be sold from the old company to the new company (‘newco’) at fair market value, necessitating an independent valuer and oversight by a licensed insolvency practitioner. This approach, common in scenarios like football clubs, facilitates job retention and prevents receivership or bankruptcy.
Personal Guarantees Remain: Liquidating the company does not dissolve personal guarantees held by directors or shareholders. These agreements with finance providers are highly enforceable, obligating directors to repay personally guaranteed finance.
TUPE Does Not Apply in Liquidation: The TUPE regulations[3]Trusted Source – GOV.UK – Business transfers, takeovers and TUPE, safeguarding employees during corporate sales, do not apply in liquidation scenarios. This allows for the renegotiation or termination of employment contracts in both compulsory or voluntary liquidation.
Limited Credit Accounts with Suppliers: Re-establishing credit terms with suppliers for a new company might be challenging without adequate financial history or trust. Suppliers may require upfront payments or shorter credit terms initially.
How Company Debt Can Assist You
Starting a new company after liquidation is a complex process that requires careful legal navigation and strategic planning. Insolvency practitioners such as ourselves play a crucial role throughout this process, not just in asset valuation. We can guide you through the legal requirements, help you understand and comply with Section 216 restrictions, and provide valuable advice on structuring your new venture.
For comprehensive advice and support, reach out to Company Debt today. We offer free initial consultations and are happy to arrange face-to-face meetings. Let’s navigate your next steps together.
Contact us via:
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Are There Any Restrictions on the Industry or Sector for Starting a New Company After Liquidation?
No specific legal restrictions prevent you from starting a new company in the same industry or sector as your liquidated company. However, if the new company operates in a way that suggests it’s a direct continuation of the liquidated company, especially if using a similar name, you must adhere to the rules surrounding the reuse of company names and avoid misleading creditors or customers.
What Happens to My Employees if I Start a New Company After Liquidation?
Employees of the liquidated company are not automatically transferred to your new company. The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) does not apply in liquidation scenarios. You may choose to hire them in your new company, but this process must be conducted as a new employment engagement, following standard recruitment procedures.
Can Previous Creditors of My Liquidated Company Claim Against My New Business?
Creditors of the liquidated company cannot directly claim against your new business if it is a distinct legal entity and there has been no wrongful or fraudulent behavior in transferring assets or conducting business. It’s important to maintain clear separation between the two entities and ensure all transactions are conducted at fair market value and with transparency.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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