Re-Use of an Insolvent Company Name
Directors: Avoiding Personal Liability for Re-use of a ‘Prohibited Name’ – Some of you may know that quite often, when a Company is placed into an insolvency process, a sale of the business and assets is completed whereby usually, Goodwill and the the re-use of the company’s name or trading style are some of the key assets in this insolvent business sale. This gives the Directors of the insolvent Company to chance to retain the customer base going forward however to protect creditors, insolvency law places restrictions on the re-use of a company’s name by any new company where the “Oldco” has entered insolvent Liquidation. Therefore this article specifically seeks to provide guidance on how directors can avoid personal liability for the re-use of an insolvent company name…
What area of law considers this topic?
This area of law is mainly covered in section 216 and section 217 of the Insolvency Act 1986.
What names cannot be re-used? / What names are prohibitive?
Pursuant to section 216 of the Insolvency Act 1986, a prohibited name is any name by which a company (which goes into insolvent Liquidation) was known at any time within the period of 12 months prior to the insolvent Liquidation and which is so similar so as to suggest an association with that company, (which might therefore mislead creditors).
When does this (s.216) apply? / When does the re-use of company name legislation apply?
Section 216 applies where a person who was a director or shadow director (i.e. a person acting in a quasi director role) of a Liquidated company in the 12 months before Liquidation intends to be a director or be otherwise directly or indirectly concerned or take part in the promotion, formation or management of a new company (within 5 years) using a prohibited name.
What happens if I re-use a prohibitive company name?
It should be noted that in accordance with section 216, any person who breeches this section is likely to be considered personally liable for the any debts of the new company incurred at a time when he was a director of that new company. Furthermore, he may also be liable to imprisonment and/or a fine.
What is the Solutions to the Re-Use of a Company Name?
Directors and quasi directors can avoid personal liability by falling within one of the exceptions contained in the Insolvency Rules 1986, or by making an application to Court.
1) GIVE NOTICE – The first exception is where notice is given to all of the creditors of the company that has entered insolvent Liquidation.
There are two scenarios where notice is given, these are:-
– Where a director of the insolvent company acquires its business and assets from its Liquidator and proposes to trade using the company’s name or trading style.
– In the case of the directors of the insolvent company acquiring its business and assets from an Administrator where the company may later enter insolvent Liquidation.
Beware the directors should note that this exception is not available where the director is already acting is breach of s.216.
2) APPLY TO COURT – The second exception is where the directors set up a new company which trades (or proposes to trade) using a name similar to that of the insolvent company before the company’s Liquidation, the directors must apply to court for permission to trade under the prohibited name. Provided that the directors apply for permission within 7 days of the company’s Liquidation, they have a grace period of six weeks (or until the court hears the application, whichever is the longer) in which they may trade under the prohibited name without sanction.
3) ALREADY TRADED FOR 12 MONTHS – Finally, the third exception is where the new company was established and has traded under the potentially prohibited name for 12 months or more prior to the insolvent company entering Liquidation.
Can I apply to court – out of time?
Retrospective applications to Court may be made out of time where none of the exceptions apply, however, even where permission is granted by the Court exempting the directors from liability for the debts going forward, this will not give retrospective exemption to debts incurred already, nor will it grant immunity from criminal prosecutions. Therefore action should be taken early to avoid penalty!
Summary / Contact us…
It should be noted that H M Revenue and Customs are particularly active in picking up and pursuing directors and shadow directors where they have fallen foul of the statutory
requirements. This is a complex area of law and the ramifications for a director who fails to take the necessary steps are potentially huge. Directors should therefore consider seeking professional assistance to protect themselves and ensure that they do not breach the provisions.
For further details call our midlands based office in Rugby, Warwickshire on 01788 544544.