Can I re-use my Company’s name?
Except in certain circumstances, Section 216 of the Insolvency Act 1986 prohibits the re-use of a company name where a company has entered insolvent liquidation. The section does not apply in any other insolvency process unless insolvent liquidation follows administration or a Company Voluntary Arrangement.
Section 216 states that:
- Any person that has been a director or shadow director in the 12 months preceding liquidation
- Shall not in the period of 5 years following liquidation
- be a director of a company that is known by a prohibited name
- in any way be involved, whether directly or indirectly, in the promotion, formation or management of any such company
- 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
A prohibited name is defined in the Act as the name by which the liquidating company was known in the 12 months preceding liquidation or it is a name that is so similar to the name of the liquidating company that it suggests a connection.
The Act goes on to include trading names/ styles within the definition of prohibited names and point (c) above applies to subsequent businesses that need not be a limited company.
If a director acts in contravention to the law, the penalties can be serious. A breach of Section 216 is a criminal offence punishable by imprisonment and/ or a fine. In addition, a person acting in breach also makes themselves personally liable for the debts of the successor business.
There are three exceptions to Section 216 as follows:
- the person obtains a Court Order permitting that person to be a director of a company with a prohibited name or to carry on business with a prohibited name;
- that the successor business has been trading for a period of at least 12 months prior to the liquidating company entering liquidation;
- that the successor company acquires the whole or substantially the whole of the business from the insolvent company under arrangements made by the liquidator or a prior office holder (such as an administrator, administrative receiver or supervisor of a company voluntary arrangement).
It should be noted in relation to exception 2, there has to be actual evidence of trading such as transactions flowing through the successor business’ bank account. Directors should be very careful as we have seen instances where a director has fallen foul of the law due to there being insufficient evidence of trading or for example, where the successor company has filed dormant accounts within the 12 month period.
In relation to exception 3, case law has made it clear that a person cannot be a director of the successor company with a prohibited name or involved in the formation, promotion or management of that company until after the successor company has purchased the whole or substantially the whole of the assets from the liquidator (or prior office holder). Accordingly, there will usually be a break in trading which may have a negative impact for the business. Directors should therefore consider whether an alternative process (such as a pre-pack administration) will preserve more value for the benefit of the company’s creditors.
The director must also comply with certain rules regarding advertisement of his/ her intention to act as a director of a company with a prohibited name and ensure the creditors of the former company are made aware.
Given the severe penalties for acting in breach of Section 216, we would always recommend taking early advice. White Maund can guide directors through what can be quite a complicated process.