I was sitting in the pub on Sunday afternoon with the family. It was rammed with diners. It was great to see a great British pub doing well. But for me there was a tinge of sadness, because I know what could be coming some time down the line some time for the publican. Why / what is that? The company managing the pub went into insolvent liquidation in 2019. The director did nothing to get approval for his phoenix company to reuse the pub’s name – after all why should he, it’s been trading using that name for many, many years?
The issue is, in the pub, restaurant, and wider hospitality field, the road to and out of insolvent liquidation, whether that be a Company Voluntary Liquidation (‘CVL’) or Compulsory Liquidation, is fraught with complexity.
Perhaps one of the most challenging tasks for directors is manoeuvring the regulatory landscape surrounding the re-use of insolvent company names or trading style, also known as the Prohibited Name rules, under Sections 216 and 217 of the Insolvency Act 1986.
For many businesses in the hospitality industry, a company’s name carries with it a legacy, a reputation, and customer trust. Some of the names used are hundreds of years old, it’s almost as if the current operators are caretakers of something far bigger than them. So the desire to carry forward that name after insolvency into the phoenix operation is perfectly understandable. However, doing so is neither straightforward nor without risk.
For a good many years now, I’ve noticed a worrying trend where these crucial rules have been overlooked during CVL proceedings carried out by some other insolvency practitioners. Some are worse than others. This poses severe risks for directors, particularly when these rules have not been communicated effectively nor understood in their entirety. And I see that a lot, so much so that the first thing I do when asked to consider giving advice to a new potential client is ask if they’ve gone through a similar process before.
While there are – albeit rare – exceptions to the Prohibited Name rules, implementing them requires adherence to the precise letter of the law, involving court approvals, prior notifications and strict timelines. Any – even on face value, slight – deviation from the set procedures will plunge directors into serious legal violations.
It’s important for directors to fully comprehend the importance of these rules. The consequences of non-compliance are twofold – being a criminal offence is the smaller of the two consequences! You see, directors also face personal liability for the debts of the new company / phoenix. This liability persists for as long as the name is reused, with repercussions potentially appearing even 5, 10, 15, 20 + years later, including the risk of personal bankruptcy and / or asset seizure. And it applies to all debts of the phoenix. It’s as if the director signed a personal guarantee for the debts of newco – if you’re asked to sign a pg for a debt, you would be spending a lot of time thinking about it, so why not invest a similar amount of time investigating and fully understanding the rules over the re-use of names?
Ignorance of these regulations is widespead – oh, and by the way, ignorance is no excuse – and often has severe, long-term consequences. The potential for being held personally liable for the debts of newco can be, and often is, financially devastating for the directors. This eventuality becomes more alarming when one considers that it could take many years before the consequences of non-compliance are realised, and could involve the loss of almost all your personal assets, including your home.
If I, as an Insolvency Practitioner, am noticing this upward trend in non-compliance from a distance, it’s safe to assume that large creditors like HMRC and in the case of the hospitality industry, the breweries and other major suppliers, are also aware of this situation. In fact, the creation of a dedicated HMRC department to pursue such breaches is a distinct possibility, made far easier than filling the government’s coffers than other possible routes given the ready availability of publicly accessible evidence.
In conclusion, while retaining a business name post-insolvency might seem like an attractive strategy on the face of it, it carries significant legal complexities and potential risks that directors must be mindful of. Directors must strive to understand these critical regulations fully and employ the right insolvency practitioner and experienced lawyers to ensure strict compliance in order to to safeguard their future.