Re-use of a company name following liquidation
If your company has been liquidated and you are in the process of setting up a new business, you may be tempted to use the same, or a similar name, for your new venture. This may be particularly true if the new company is going to offer the same services and operating within the same sector as the liquidated business. However, there are strict rules governing this process which you must be aware of before establishing the new company. The restrictions are laid out in section 216 of the Insolvency Act 1986. Let’s take a closer look at what exactly this piece of legislation says.
What does section 216 say?
Following the insolvent liquidation of a company, anyone who has acted as director or shadow director in the 12 months prior to the liquidation are forbidden from forming, promoting or managing a company with the same or similar name to that of the insolvent company. Once the company has been liquidated, the name becomes ‘prohibited’. A prohibited name includes not only the name of the company at the point of its liquidation, but any name with which it has been known by in the preceding 12 months. It also includes any name which is deemed similar enough to cause confusion or suggest a link to the liquidated company. These rules apply to company directors, owners or officers of the company who open a new business, whether or not it is incorporated, for a period of five years following liquidation.
Why are these rules in place?
These rules aim to prevent a director running up debt, liquidating the company and consequently leaving creditors out of pocket, only to then set up a brand new company with a clean financial slate, operating under a similar trading name, and appearing to all intents and purposes as though nothing has changed. This act is known as ‘phoenixism’ and is strictly prohibited by law. Failure to comply with these rules is a serious matter and the consequences are severe. Being found guilty of phoenixism could lead to a substantial fine, becoming liable for the new company’s debts, or even imprisonment in the most serious of cases. These rules not only serve to prevent directors from evading responsibility for their company’s debts, but also to protect the interests of outstanding creditors.
Exceptions to the rule
Despite the strict rules that apply to re-using a company name following its insolvent liquidation, there are three exceptions where this does not apply:
• The purchase of the business from the liquidator – This exception applies if the new company acquires the whole or a substantial part of the business from the Insolvency Practitioner. Furthermore, a notice must be sent to all outstanding creditors informing them of the purchase within 28 days, along with an advert placed in the London Gazette. The important point is that only when all of these conditions have been complied with can a prohibited person be appointed as a director the new venture with the similar name.
• Permission from the court – In order for the court to grant permission to re-use the liquidated company’s name, you will need to demonstrate the new company has a solid financial footing and an experienced team who can guide the future finances of the business. Application to the court must be made within seven days of the liquidation and you are permitted to use the name whilst the court decides, or for a period of up to six weeks.
• Existing use – Should the prohibited name already be in use by a company which has been trading for at least 12 months leading up to the day of the liquidation, the business will usually be able to continue using the name. The company must not have been dormant at any point during this period in order for the exception to apply.
Mistakes can be costly, not only financially but also on a personal level. Pleading ignorance of the rules is not an adequate defence; therefore in order to protect your business, and yourself, you need to take expert advice from a licensed Insolvency Practitioner. It is always advisable to think carefully about forming a new company, and, if you are proposing to use a prohibited name, which exception you will be relying upon. This ensures you can formulate a plan for the new company which is in full compliance with section 216.
BLB Advisory Limited has years of experience helping company directors and accountants alike navigate the complexities of business insolvency. We can help with the liquidation of your current company, and provide the help and advice you need to ensure your new venture is fully compliant when it comes to registering its company and/or trading name. To arrange a free no-obligation consultation with one of our licensed Insolvency Practitioners call us today on 02475 097627.