Can a Director re-use a company name following Liquidation?
Well the quick answer is ‘it depends’…
If you want to re-use a company name after it has become insolvent, care must be taken to ensure you keep within the rules, or you could face criminal proceedings and become personally liable for the successor company’s liabilities.
When is a name prohibited?
Section 216 of the Insolvency Act 1986 specifically deals with the restriction of the re-use of a company name where a company has gone into insolvent liquidation. It also places certain restrictions on anyone who was a director of a company (the liquidating company) at any time in the period of 12 months before that company’s insolvent liquidation.
Also, except with the leave of the court or in such circumstances as prescribed in the Insolvency Act and Rules, that person must not do any of the following for five years after the company went into liquidation:
- be a director of any company that is known by the ‘prohibited name’;
- be concerned in any way whether directly or indirectly in the promotion, formation or management of any company under a prohibited name;
- in any way, whether directly, be concerned or indirectly or take part in the carrying on of a business carried on (otherwise than by a company, such as a partnership or sole trader) under a prohibited name.
What is an example of a prohibited name?
For the purposes of Section 216 of the Insolvency Act 1986, a name is a prohibited name if:
- It is a name by which the liquidating company was known at any time in the 12 month period before liquidation, or
- a name which is so similar to such a name falling with paragraph (a) as to suggest an association with the liquidating company.
For example, if a company in insolvent liquidation was registered at Companies House as ACME Limited and it used the trading name Duff, then the following would apply:
- the registered name ACME Limited or Duff Limited would be prohibited;
- the trading name ACME or DUFF would be prohibited;
- the trading name ACME or DUFF used by an unincorporated business (such as a sole trader or partnership) would be prohibited;
- if a company or business had a registered name or trading name so similar as to suggest an association with ACME or DUFF, the name would be prohibited.
Exceptions to S216
Rules 22.4 to 22.7 of the Insolvency Rules 2016 provide three exceptions to the restrictions of S216 of the Act:
- Where the former director of the liquidating company intends to purchase the business and assets of the liquidating company.
- With permission of the Court. If an application is made within 7 days of the liquidation, the director can use the prohibited name for the earlier of 6 weeks from the date of liquidation or the date the Court disposes of the application either by granting permission or not.
- Where the company with a prohibited name has been continuously trading for 12 months or more and must have used the prohibited name for the entire period.
The first of the three exemptions is the one we see most frequently and has evolved significantly since its introduction in the 1986 Insolvency Act. The exception states:
- a person was within the period mentioned in S216, a director or shadow director of an insolvent company that has gone into liquidation; and
- the person has acted in contravention of S216 for the purposes of carrying on the whole or substantially the whole of the business of the insolvent company where that business is (or is to be) acquired from its liquidator (or if the sale/ purchase has been agreed before liquidation) from its Administrators, Administrative Receivers or Supervisors of a Company Voluntary Arrangement.
In order to gain the exception, the person must send a notice to every creditor of the insolvent company and publish the notice in the London Gazette. The notice can be given prior to the completion of the purchase of the business but no more than 28 days after completion.
In the case Churchill & First Independent Factors 2006, a creditor of a successor company claimed that two directors (who had also been directors of a company in liquidation) were in breach of the rule (as per the 1986 drafting) as they had formed the successor company and were directors of it prior to the acquisition of the business from the liquidator. This ruling made the exception virtually impossible to apply in any case where the director was already working in the management of a successor company. The Insolvency Amendment Rules 2007 altered the wording of the rule so as to allow any director to gain the exception providing the prescribed notice has been given and the successor company has not yet adopted the prohibited name.
The 2016 rules go further to say that any person who has acted in breach of S216, cannot give notice under the rule and cannot gain the exception.
Quite often this is where we see directors fall foul of the rules by setting up a company with a prohibited name and being appointed as director prior to liquidation. Once the liquidation occurs a director is then immediately in breach and whilst he/she may immediately resign or change the name of the company, the breach has already occurred. The simplest way around the problem is to set up a newco with a name that is not prohibited, the director can be appointed, the newco can then acquire the business from the liquidator, the requisite notices given and the company name can be changed. Alternatively, if the management fear that a change in name for a short period is likely to be detrimental, a newco can be set up with a prohibited name but the directors of the insolvent company cannot be appointed until after the business has been acquired from the liquidator and providing the requisite notices are given. Particular care should be given in pre-pack and administration sales where liquidation is chosen as the exit route from administration.
What could happen if a director doesn’t follow the rules?
If a director contravenes S216 of the Act, he/she is committing a criminal offence and may be prosecuted by the Department for Business Energy & Industrial Strategy. There is also a possibility he/she could go to prison if convicted.
In addition, under Section 217 of the Act, the director could be made personally liable for the debts incurred during the time that he/she was involved in managing a business using a prohibited name, even if it was a limited company. This could happen whether the director is prosecuted under S216 or not. Even if a director is not contravening S216 of the Act, he/she may be personally liable for the debts of a company if he/she agrees to be registered as a company director and acts on instructions from someone he/she knows is contravening S216.
We would always recommend a director takes early advice in order to mitigate their risk.