If you have been a director of a company that has gone into liquidation or you are looking to liquidate a company, and wish to reuse your old company name or trading name, you need to be aware of s216 and 217 of the Insolvency Act 1986 (IA).
Section 216 IA
In accordance with s216, if you are a director or shadow director of a company (the liquidating company), at any time in the 12 months before it goes into insolvent liquidation (the 12-month period), you are prohibited for 5 years from being involved in another company with the same or a similar ‘prohibited name’ as the liquidating company.
Under s216 a ‘prohibited name’ is:
a name by which the liquidating company was known at any time in the 12-month period; or
a name which is so similar so as to suggest an association with the liquidating company.
It therefore encompasses the liquidating company’s registered name, trading name, or any other name under which the liquidating company carried on business during the 12-month period.
Except with the court’s permission, you cannot at any time during the 5 years, beginning with the date of liquidation of the liquidating company:
be a director of any company that is known by the ‘prohibited name’; or
be concerned in the promotion, formation or management of any company under a prohibited name; or
in any way, be concerned or take part in the carrying on of a business under a prohibited name.
Section 216 was introduced to address “phoenixism”, which is the practice of liquidating an insolvent company to evade paying outstanding creditors and later starting up a new company with the same or a similar name to continue on as before.
Penalties for using a ‘prohibited name’
A breach of s216 is a criminal office punishable by imprisonment, a fine, or both. You could also be disqualified from being a company director. Additionally, under s217 IA you can be made personally liable for the debts and liabilities which were incurred by the new company operating under the prohibited name during your management of it.
Exceptions to s216 IA
These penalties can be avoided if any one of the following three exceptions to s216 apply:
Permission is granted by the courts for the new company to re-use the prohibited name. The application for permission must be made within 7 business days of the liquidating company entering liquidation. It grants temporary permission (a maximum of six weeks) to re-use the prohibited name.
Where you are a director of another company, (often a subsidiary company of the liquidating company) which has not been dormant and which has already been trading using the ‘prohibited name’ for the whole 12-month period prior to the liquidating company’s liquidation. In this situation you may be able to retain the name without obtaining the court’s permission.
Where the whole, or substantially the whole of the liquidating company’s business or assets are sold by a licensed insolvency practitioner (liquidator) to a new company or business, of which you intend to be a director or be concerned in the promotion, formation or management of. In this situation, you may be able to re-use the prohibited name provided you first send a notice in a prescribed format to the liquidating company’s creditors and place this notice in the London Gazette within 28 days of the acquisition.
How we can help
If you would like any advice or assistance with the above, please contact our insolvency experts at Farleys on 0845 287 0939 or by email.