A director (or a shadow director) of a company prior to insolvent liquidation could be bound by Section 216 of the Insolvency Act, 1986 – this may govern their involvement with companies with the same or a similar name within a set period of time following the liquidation. Directors need to be aware of these laws because breaking them is a criminal offence and can result in a custodial sentence, a fine, or both.
What is Section 216 of the Insolvency Act and who does it apply to?
Section 216 of the Insolvency Act 1986 restricts the re-use of a name previously used by a company that has gone into liquidation. The restriction applies personally to a director or shadow director of the liquidated company. A name which cannot be used is known as a “prohibited name”.
A prohibited name is one by which the liquidated company was known or which the company used as a trading name at any time in the 12 months immediately before liquidation. A name which is similar to the prohibited name will also be caught by this provision. The restriction also applies to companies which have been wound up and placed in liquidation as an exit route from administration.
The restriction applies to any person who was or acted as a director (including shadow directors) at any time during the 12 months immediately before the winding-up. For five years from the date of liquidation, that person is not permitted to be a director or take part in the promotion, formation, or management of a company using a prohibited name. The prohibition extends to the reuse of the prohibited name by a business partnership or a sole trader.
What happens if I use a prohibited name for my company?
It is a criminal offence to contravene section 216. The penalties are a possible fine or even a term of imprisonment. A director who trades using a prohibited name may be personally liable for any debts incurred by the successor company, as detailed in Section 217 of the Insolvency Act. It is also an offence to assist somebody in managing a business which trades under a prohibited name.
“Directors of companies in financial difficulties, and possibly heading for liquidation, need to be aware of Section 216 and the serious consequences of contravention.
Ignorance is no defence.
Does Section 216 apply? If the answer is yes to the following 3 questions, then Section 216 applies, and the director should take advice:
- Has the person involved been a director or a shadow director of a company?
- Was that company liquidated?
- Was the person involved the director or the shadow director in the period of 12 months before the company’s liquidation?”
Why was Section 216 of the Insolvency Act introduced and are there any exceptions?
The legislation was introduced to stop the practice of ‘Phoenixism’, which is where directors would be able to liquidate their companies, and in so doing, avoid paying their creditors. They could then start a new company with the same or similar name in the same or similar line of business.
There are three exceptions to Section 216:
- Where substantially all the assets of the business are sold by an insolvency practitioner, for example, a Liquidator or an Administrator and the purchasing company gives notice in a specified form to all the creditors of the insolvent company. This procedure is complex with many pitfalls and legal advice should be taken and is unlikely to be applicable to a company which goes into liquidation without previously being in administration.
- Where the Court grants permission for the director to reuse the name. This application should be made within seven days of the date of liquidation, although in certain circumstances it can be made at a later date. Legal advice must be taken before making such an application.
- Where a person is a director of another company that has already used a prohibited name continuously for twelve months up to the date of liquidation provided that the company has not been dormant.
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