If you’re the director of a business and you intend to place your company into liquidation, it’s important you consider your plans after the company has been liquidated.
If you want to set up a new limited company and hope to use the same or similar liquidated company name, then beware. With the same or a similar name, you must be aware of section 216 of the Insolvency Act 1986, which places restrictions on the use of the liquidated company’s name.
Definition of Section 216
If you are the owner, director or officer of a company which is either undergoing an insolvency procedure, such as an administration or liquidation or has recently undergone such a procedure, there are restrictions on your involvement with a new business which trades under the same or a similar name. This ‘similar’ name becomes a ‘prohibited name’ in law and was intended to prevent directors accruing debts and simply closing the company leaving creditors in the lurch, and starting up the next day with the same, or similar company name. This known as ‘phoenixism’ and contravention of this law is a criminal offence and can result in imprisonment, fine or both. This law is covered off under section 216 of the Insolvency Act 1986.
Ignorance of this law is no defence and directors who ignore this law either through ignorance or just do not care are headed for worse to come. Under section 217 of the Insolvency Act, the directors or even controlling managers can be made personally liable for the company debts and or the debts can be transferred across to the newly created company.
The use of the name it itself is not the only trigger as any insolvency lawyer will tell you – transferring employees across to the newly created company under some circumstances may provide evidence of a breach of Section 217. This is a very tricky area so do not second guess as mistakes at this stage can be very, very costly.
The message is very clear if you want to start again with a newly created company following an insolvent closure then seek specialist insolvency advice. Your accountant is unlikely to know the answer to these questions you need specialist insolvency advice and need to prove you sought it.
You will be asked to verify when you sought insolvency advice and from whom as part of any insolvent liquidation process.
What does the law say?
Section 216 of the Insolvency Act 1986 dictates that directors of a company in the 12 months before its liquidation, cannot act as the director of a new company with the same or a similar name for five years. This applies not jut to company directors, but also shadow directors i.e. anyone taking part in the promotion, formation or management of a limited company.
What is a prohibited name?
The ‘prohibited name’ restrictions include any name the liquidated company has been known by at any time in the 12 months immediately before the liquidation. This might be the official company name registered at Companies House, a trading name, or any name that’s similar enough to the registered or trading name to suggest an association with the liquidated company.
For example, if Strategic Technologies Limited entered into insolvent liquidation, only for a new business to be set up by the same management team operating as Strategic Technology Limited, this will be caught by the restriction.
Equally if Strategic Technology Limited traded as ST Consultancy if a newly created company was set up called Bloggs Ltd but traded as ST Consultancy section 216 would be breached.
If you’d like further clarification on prohibited names, get in touch and we can tell you whether you’re likely to be caught by the restriction and how you could avoid liability.
How is the use of a ‘Similar’ name Determined?
The objective test for whether a name is too ‘similar’ is if a reasonable man on the street would believe the liquidated company and the new company are in any way connected based on their names alone.
What are the Penalties for Contravening Section 216?
There are no mitigating factors which can be taken into account for this offence. You will be found guilty or not guilty by the court, and receive a penalty which includes one or more of the following:
• A fine
• Personal liability for the company’s debts
However, before the case gets to this stage, you will usually be contacted by the Secretary of State requesting that you either change the company’s name or step down as the company director. In reality, either step would defeat the purpose of purchasing the goodwill of the old company and have serious consequences for the new company, so it’s highly advisable you stay on the right side of the law from the off.
Exceptions to Section 216
If you want to start a new company after insolvent liquidation and you would like to use the same or a similar company name, there are some exceptions to section 216.
If you have been the director of a company with the same or a similar name to the liquidated company, which was trading 12 months before the liquidation of the old company, you can continue to use that name.
A company exists with the same or a similar name as the insolvent liquidated company, but you are not yet a director;
You are the director of another company, but that company’s name is not yet similar to or the same as the liquidated company;
You can give notice, within the specific notice period and in a necessary manner, to the creditors of the old company to inform them that you intend to be a director of a new company with the same or a similar name.
In some circumstances, if you want to use the same or a similar name as a liquidated company, you can apply to the court for permission to do so. However, the application to the court to use the old company’s name must be made within seven days of its liquidation.
All of these exceptions are subject to strict time limits. For this reason, it is usually preferable to consider your position as a director of a new company before the old company is liquidated. This will give you more time to take the necessary steps to comply with the exception.
How can we help?
Be aware any specialist lawyer will tell you the list above is not exhaustive, and we would always recommend the use of an insolvency lawyer as a mistake can be very, very costly. We have our insolvency lawyer colleagues to call upon who we have used for years, and they will provide free initial advice.
If you want to liquidate a company and would like to reuse the company name, please get in touch with our expert team today on 08000 746 757. Be aware we would normally coordinate the purchase of any name as part of a pre-pack or similar business rescue solution.
Not only can we liquidate or rescue your business in the most professional and effective way, but we can also help to put the necessary arrangements in place to help you prepare for life as the director of a new company with the same or a similar name.