Under Section 216 of the Insolvency Act 1986, there is a restriction against a director reusing the name of a company which gone into insolvent liquidation, where he was a director or shadow director of the insolvent company at any time in the period of 12 months ending with the day before it went into liquidation.
This applies where a director or a shadow director of a company that has gone into insolvent liquidation operates, without the permission of the court, as a director or shadow director of a new company with a similar name to that of the insolvent company in the five-year period following the date of insolvency. The penalties if found liable include imprisonment, a fine or both, together with personal liability for the debts of the new company.
A name is prohibited either if it is the same as the name of the liquidated company or if it is so similar as to suggest an association with that company. However, the prohibition on the use of such names only applies where a director or shadow director of the former company is associated with the second business.
The prohibition is not confined to a company or business's registered name; trading names are also covered by the prohibition.
Section 216 of the 1986 Act prohibits any former director from acting for a period of 5 years beginning with the day on which the liquidating company went into liquidation—
(a) as a director of any other company that is known by a prohibited name, or
(b) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any such company, or
(c) in any way, whether directly or indirectly, be concerned or take part in the carrying on of a business carried on (otherwise than by a company) under a prohibited name.
What are the implications?
A person acting in contravention of this rule, will be personally liable for the "relevant debts" of the new company where they are involved in the management of the new company or act, or are willing to act, on instructions from a person that they then know to be in contravention of the law.
In respect of those acting in the management of the new company, “relevant debts” means debts and other liabilities of the new company, incurred whilst the person is involved in its management.
Liability is restricted to the time that the new company is known by the prohibited name. Furthermore, where the second company carries out only part of its business under a prohibited name, the civil liability will be restricted to debts incurred in carrying out that part.
Liability for the relevant debts is automatic. The creditor of the new company can simply bring a claim against those involved in the management of the new company.
Liability is not just for “debts” in the strict sense, but also for "other liabilities of the company" including damages claims.
How to avoid liability: the exceptions to the rule
The first exception to the general rule: Insolvency Rules 2016 rule 22 Notice to Creditors
By rule 22 Insolvency Rules 2016, a person may avoid liability for reuse of a prohibited name if he first gives notice to all creditors of the insolvent company of his intention to act as a director of the new company.
Where a person has been a director of a company which became insolvent wants to start a new company, that new company should not use the same name or trading name as the insolvent one without first following the guidance below. This Rule 22 exception will enable the director to avoid liability for the new company having or trading under the same name as the insolvent company.
To meet the exception, follow these detailed requirements:
- Notice of the intention to use the prohibited name is given by the director, who would otherwise be in breach of the law, to every creditor of the insolvent company whose name and address is known by that person, or is ascertainable by that person on the making of such enquiries as are reasonable in the circumstances. The notice must also be published in the London Gazette.
- The director must give the notice before acting in breach of the rule. This means that notice must be given:
- before the first company goes into insolvent liquidation; or, if after that date,
- before the new company adopts the prohibited trading name; or, if after that date,
- before the director is concerned in the carrying on of the business by the new company; and where the new company buys the assets of the insolvent company,
- No later than 28 days after completion of the sale of the business to the new company.
- The content of the notice needs to comply with rules 22.4(3) (b), (c) and (d) and rule 1.12 of the Insolvency Rules 2016). The Insolvency Service has provided a template notice: Insolvency Service, Rule 22.4 notice to creditors – s216 re-use of a prohibited name. which can be downloaded and completed and then sent to the London Gazette for publication.
The notice may be given before the formal insolvency of the old company, which will avoid any risk of the director taking on liability for the breach of the rule, or to any creditor, before the new company commences trading under the same name.
The second exception to the general rule: Application to the Court for permission to act as a director of a company with a prohibited name
The application for leave to act in circumstances that would otherwise be prohibited is made, under section 216(3) of the IA 1986, by the person to whom the prohibition attaches, that is, the director or shadow director of the insolvent company.
The director must apply for permission of the court not later than seven business days from the date on which the old company went into liquidation. If he does, he may, during the period between the date the old company goes into liquidation and for a six week period after that, act as a director of the new company despite not yet having the permission of the court under section 216(3) Insolvency Act 1986.
The application is made to the Insolvency court and must be supported by a witness statement from the director.
The court will consider the representations of the liquidator of the insolvent company and will require the applicant to give notice of the application and the order to all creditors of the insolvent company.
At the hearing of the application, the court will look at the reasons for the demise of the old company, the conduct of the director in that company and will principally consider whether there is a risk to the new company’s creditors, such as where company law requirements were not met, or whether there was substantial risk that people would be confused by the similarity of names.
The court cannot grant leave that applies retrospectively. Accordingly, if a breach of section 216 has already occurred, the subsequent grant of leave under section 216(3) will not serve to avoid any liability which has already arisen. It is therefore wise to apply promptly.
The court can grant leave in relation to a dormant company with a prohibited name. However, the dormant company or companies in question must be specified: the court will not grant a general permission to use a prohibited name in relation to companies that have not yet been incorporated.
If satisfied, the court will grant leave for the applicant to be a director of and concerned in the promotion, formation and management of the new company, and/or to carry on business in the name that would otherwise be prohibited.
Key takeaways
Act quickly – it is easier and simpler to give the notice to creditors before acting as a director of a new company with a prohibited name, than having to incur the expense and delay of making an application to the court.
Prepare in advance - if a director intends to act as a director of a new company using the same or substantially the same name as an insolvent company, prepare the notice to creditors in advance so there is no delay.
If an application to the court is necessary, make your application as early as possible – to take advantage of the six week grace period and avoid any potential liability for the debts of the new company.
Stephensons commercial and insolvency team are on hand to advise directors of insolvent companies on the potential pitfalls and personal liability they may face when a company becomes insolvent. We can assist with the preparation of the exception notice to creditors and, where necessary, act in the proceedings for the application to the court. Contact us today on 0161 696 6170 to speak with one of our specialist solicitors.
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