We are regularly asked to advise on the implications for directors of an insolvent company wishing to act as a director of other companies with the same or similar names.
In the following article, Jonny Jones, an associate in our restructuring and insolvency team, provides information on using prohibited names.
Section 216 Insolvency Act 1986 (‘the Act’)
The Act prohibits anyone who was a director or shadow director of a company in the 12 months before that company entering into an insolvent liquidation, from being a director of any company with the same or similar name of the insolvent company (a “prohibited name”), for five years from the date of liquidation.
The individual does not need to be registered as a director of the new company; it would be enough to be, whether directly or indirectly, concerned or take part in the carrying on of a business under a prohibited name. The Act prevents such individuals from being involved in the company’s promotion, formation or management, and the courts will not be shy to impose strict sanctions on those who do not abide.
The provisions of Section 216 of the Act can be merciless regardless of how innocent the director’s intention may be. The court can impose strict criminal and civil penalties for re-using a prohibited name, so a director looking to restart a business after a liquidation ought to do so with caution and proper legal advice.
Section 216 of the Act was created to combat the ever-increasing number of ‘phoenix companies’ – i.e., the practice of carrying on the same business successively through multiple companies that each become insolvent.
What names are prohibited?
Simply put, a name will be prohibited if:
- it is a name by which the liquidating company was known at any time in the 12 months before liquidation; or
- the name of the new company is so similar that your customers, suppliers or professional contacts are likely to assume the businesses are linked or associated.
The restrictions not only extend to names registered at Companies House; they also cover trading names and logos. Caution also needs to be taken because the court will make a comparison in the context of all the circumstances in which names were used, including the types of products, the location of the business, the types of customers and those involved in the operation of the companies.
Consequences of breaching the Act
Any director ought to be aware of the consequences of breaching section 216 of the Act as the court has the power to impose strict liability, with those in breach at risk of facing the following:
- Imprisonment, fine or both;
- Disqualification from acting as a company director of any UK-registered company for a period of up to 15 years;
- Removal of the limited liability status. You will become personally liable for the debts of the new company; and
The above are not mutually exclusive, so a director in breach can simultaneously face any or all of the sanctions.
Avoiding liability
Three statutory exceptions allow for the re-use of a prohibited company name. Close attention should be paid to the appropriate exception for the relevant circumstances because if you incorrectly rely on the exception, you will still be in breach and face the relevant consequences.
Giving notice to creditors
The prohibition does not apply where the insolvent company’s business and assets are sold, and notice is given to all creditors of the insolvent company on the following terms:
- The successor business acquires the whole or substantially the whole of the business of the insolvent company under arrangements made by the liquidator, or if the sale is before the company goes into insolvent liquidation, by the insolvent company’s administrator, administrative receiver or the supervisor of a company’s voluntary arrangements to which the company is subject;
- Notice in the prescribed form is given by the director or shadow director who would otherwise (in the future) be in breach of Section 216 of the Act to every creditor of the insolvent company whose name and address the director knows or would be able to ascertain making reasonable enquiries. The notice must be published in the London Gazette; and
- The notice must be given before the director acts in breach of the section.
Applying to court for permission
The director of the successor company can apply for leave from the court to use the prohibited name. Such applications should be made promptly (within 7 days of the liquidation) if the directors wish to seek immediate protection.
Our experienced solicitors can advise you on how and when to make such an application.
The company is already known by a prohibited name
There is a third exception to the prohibition in Section 216 of the Act where the company in respect of which the director wishes to remain in office has already been trading using a prohibited name for at least 12 months before the insolvent company goes into liquidation. The company with the prohibited name must not have been dormant in those 12 months.
