It’s vital that Directors and Shadow Directors are aware of the law surrounding company names, especially if a company has been liquidated. A director of a company, prior to insolvent liquidation could potentially be bound by Section 216, of the Insolvency Act.
Meaning that a director or shadow director’s ability to be involved with a company with the same or a similar name within a certain amount of time, following the liquidation could be affected. Breaking these laws is a criminal offence. Therefore, if broken, individuals could find themselves with a custodial sentence, a fine, or both.
If a director trades using a ‘prohibited name’, they could be held personally liable for any debts of the successor company. Plus, it must be noted that it is also an offence to assist a director in managing a business that is trading under a ‘prohibited name’.
Section 216 of the Insolvency Act 1986
Section 216 of the Insolvency Act restricts the re-use of company names that have been used by companies that have gone into liquidation. However, this law applies to directors or shadow directors if the liquidated company. A company name that can not be used if referred to as a ‘prohibited name’. This also applies to companies that have wound up and been placed in liquidation as an exit from administration.
Prohibited names
If a company has gone into liquidation, any trading name that was used in the previous 12 months prior to this is classed as a ‘prohibited name’. Or, a name for which the company was known as. Meaning this could include more than one name. Plus, names that are considered similar will also be classed as ‘prohibited names’.
Who does this apply to
As mentioned above, Section 216 of the Insolvency Act applies to anyone who was, or acted as a Director in the 12 months leading up to the winding up proceedings beginning.
The legislation was introduced to stop ‘Pheonixism’. Where directors and shadow directors would liquidate companies to avoid paying creditors. Then setting up a new company with the exact same or a similar name to the business.
How do I know if Section 216 applies to me?
If the answer to the following questions is ‘Yes’ for all three questions, then Section 216 applies to the director.
- Has the individual been, or acted as a Director or Shadow Director of a company?
- Was the company where the individual was a director liquidated?
- Was the individual, a Director or Shadow Director in the 12 months prior to the liquidation of the company?
When is this applicable?
The directors/ directors or shadow directors of a company at the date of liquidation are not permitted to be a director for 5 years. Nor are they permitted to take part in the ‘promotion, formation, or management of a company using the prohibited name’. Plus, the use of the prohibited name is also prohibited for use by a sole trader, or in a business partnership.
Are there any exceptions?
There are 3 exceptions to the prohibited re-use of a company name following liquidation, these are:
- The director receives the court’s permission to use the name. This application should be made within 7 days of the date of liquidation. We advise legal advice before making an application.
- The business is sold by a licensed insolvency practitioner, who gives the legally required notice, e.g. a Liquidator or Administrator. Plus, the purchasing company gives notice in a ‘specified form’ to all creditors of the insolvent company.
- The director is involved with another company that has been using the ‘prohibited name’ for at least a year already. Providing that the company hasn’t been dormant.
About the author
Iain Bould
Iain heads Beeston Shenton’s commercial litigation department.
Iain has 30 years of experience in Commercial Debt Recovery and Insolvency fields having worked in both Private Practice and Industry and has extensive experience working across all industry sectors and has particular expertise in working with Insolvency Practitioners in advising and recovering outstanding insolvent company ledgers.
Iain brings a pragmatic and commercial approach.
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