Using a Prohibited Name After Insolvency – Key Considerations Under Section 216 IA 1986

by | Jan 29, 2025 | Advice to Directors, Alternatives to formal insolvency, CVLs, Upsettable Transactions | 0 comments

  • Legal Restriction on Using a Similar Name
    • Section 216 of the Insolvency Act 1986 (IA) prohibits the use of the same or a similar name of a company that has entered insolvent liquidation.
    • Directors who breach this rule by promoting, forming, or managing a company with a prohibited name may face personal and criminal liability under Section 217 IA 1986.
  • Purpose of Section 216
    • Designed to prevent the so-called “phoenix” syndrome, where directors of an insolvent company continue trading under a new company with a similar name.
    • Aims to protect creditors from directors who liquidate companies with unpaid debts and then trade under a new entity while benefiting from the goodwill of the failed business.
    • While not all similar-name businesses are phoenix companies, the law applies broadly to capture all potential cases.
  • Exceptions to the Rule
    • There are three exceptions under the Insolvency Rules 2016 that allow directors to use a similar name:
      1. Notice to Creditors – Directors inform creditors of the insolvent company that they intend to continue trading under a similar name.
      2. Court Permission – Directors apply to court for approval.
      3. Pre-existing Company Exception – A company already using the name for at least 12 months prior to the insolvency, provided it was not dormant in that period.

Key Case: Maxima Creditor Resolutions Ltd v Fealy & Anor [2024]

  • Background
    • McFee Interiors Limited (Interiors) entered creditors’ voluntary liquidation (CVL) on 30 November 2013.
    • The directors continued trading with another company, McFee Ltd (ML), which itself entered CVL on 14 February 2017.
    • Maxima Creditor Resolutions Ltd acquired debts owed by ML and sued the former directors under Sections 216 and 217 IA 1986.
  • Legal Question
    • Could the directors rely on the third exception by proving ML was not dormant for 12 months before Interiors’ liquidation?
  • Key Legal Principles
    • Definition of a Dormant Company
      • Under Section 1169 of the Companies Act 2006, a company is dormant if it has no significant accounting transactions (as defined by Section 386 CA 2006).
    • Directors’ Argument
      • Claimed that as long as ML had made one significant transaction, it was no longer dormant.
    • Maxima’s Argument
      • Claimed the directors must prove consistent trading throughout the entire 12-month period.
      • A single transaction was not enough.
  • Court’s Decision
    • The judge agreed with Maxima, ruling that:
      • The company must engage in significant transactions throughout the entire 12-month period.
      • Filing non-dormant accounts alone is not sufficient evidence of trading.
      • Trading requires actual business activity, not just preparations to trade.
      • There must be evidence of income, expenditure, or liability transactions affecting the company’s financial records.
      • However, continuous transactions every day are not required – the key is regular and sustained trading.

Key Takeaways for Directors

  • Strict Interpretation of the Exception
    • To use the pre-existing company exception, a director must prove active trading throughout the 12-month period before the insolvent company entered liquidation.
    • A single transaction is not enough – there must be ongoing financial activity.
  • What Constitutes Trading?
    • Filing non-dormant accounts alone is not proof of trading.
    • Trading means actual business transactions, such as:
      • Buying materials or equipment.
      • Paying for labour.
      • Receiving or making payments that impact the company’s financial records.
  • Practical Implications
    • Directors should keep detailed financial records to prove non-dormancy if required.
    • If relying on the third exception, be prepared to demonstrate trading throughout the qualifying period.
    • Where doubt exists, seek legal advice to avoid breaching Section 216 IA 1986.

This case provides clarity on the requirements for the third exception, reinforcing that businesses must actively trade throughout the 12-month period – not just at one point – to qualify. Directors should take care to ensure compliance with the law when continuing to trade under a similar name following insolvency.    This aspect of insolvency law is a minefield – beware!