In the current economic climate it is expected that many businesses will be forced into liquidation after the Covid-related financial support is gradually reduced, particularly when the current restrictions on presenting winding-up petitions are lifted.
Inevitably many entrepreneurs will take on new business ventures and it will often be important for them to use the same or similar business name to that of the liquidated company. Is it allowed? According to section 216 of the Insolvency Act 1986 (section 216), it is not. However, the good news is that within the scope of section 216 there are exceptions, which we discuss below.
Broadly, a person who was a director (including a shadow director) of a company which has gone into liquidation (oldco) cannot be a director of a different company with the same or a similar name (newco) (prohibited name). In fact, the restriction goes further and prevents a director/shadow director from being directly or indirectly involved in the promotion, formation or management of the company with a prohibited name. It is worth noting that prohibited names include a trading name, which is not necessarily a registered name, but the name by which the company is known.
The rationale for these restrictions it to provide transparency to creditors and protect them from dealing with a company using a prohibited name without the knowledge that this is a new entity and the old company has entered liquidation.
Breach of section 216
It is worth noting that section 216 imposes a strict liability, which means that a person committing a breach does not have to be aware of the restrictions and breach to be liable.
Breach of section 216 may lead to criminal and civil liability.
Criminal sanctions include a fine or imprisonment or both. In addition, a confiscation order can be made against a director.
Whilst criminal liability only applies to a director/shadow director who is involved in the management of newco, civil liability is a little wider and also applies to any other person involved in the management of newco who acts or is willing to act under instructions given by the director/shadow director of oldco:
- A director of oldco acting in breach of section 216 is personally liable for debts and other liabilities of newco incurred during the time they are involved in the management of newco.
- A person acting on the instructions of a person whom they know is in breach of section 216 can themselves be personally liable for the debts and liabilities as are incurred at a time when they were acting or willing to act on those instructions.
Exceptions to section 216
As noted above, there are situations where directors/shadow directors will be able to rely on the statutory exceptions and use a prohibited name.
1. Notice to creditors
The first exception essentially applies to a situation where the person to whom restrictions apply is purchasing the whole or substantially the whole of the business of oldco from the appointed office-holder. In order to be able to rely on this exception, that person must give a notice of the purchase and the re-use of the prohibited name to creditors of oldco. The notice must be in the prescribed form and can be given before the completion of the transaction, but in any event no later than 28 days after the completion. Given the time constraints, this procedure should also be considered when assets are purchased from an administrator, if there is a possibility oldco may later go into liquidation.
2. Application to court
A director can also make an application to the court for permission to use a prohibited name. The application must be made within seven business days of oldco entering liquidation. Once made, it provides a temporary protection until the earlier of (i) a period of up to six weeks of the commencement of the liquidation or (ii) the court's decision to grant permission. If permission is granted, the court will usually direct the applicants to serve notice on the creditors of oldco as above.
3. Newco already known by the prohibited name
A director can also use a prohibited name without taking any action when newco has been known by that name and trading for the period of 12 months prior to the liquidation of oldco.
Directors who are interested in starting a new business with the same or similar name to a company which will be liquidated (or subject to another insolvency procedure that may convert to liquidation), will only be able do so without risk of liability if one of the three exceptions apply. It is important that directors plan in advance and seek early advice to avoid criminal and/or civil sanctions.
For more information on the article above contact Karolina Lewandowska.