If you’re a director of a limited company that is going or has gone into insolvent liquidation (ie Creditors Voluntary Liquidation or Compulsory Liquidation) and you would like to continue to use the same or similar name, read this article.
Why?…
… because you are automatically prohibited by law to use that name or to be involved in the management, promotion or formation of the new company using that name – all for a period of 5 years.
And if you break the rules, you run the risk of both civil and criminal liability. And being banned as a director. And the civil liability extends to you being made personally liable for the ‘relevant debts’ – those incurred while you used the prohibited name – incurred by the new company using the prohibited name. Yes, personally liable…
Falling foul of the law will hurt…
So why am I blogging on this right now?
Simple really, so many people are ignoring it. By way of an example, I’m seeing lots of pubs, restaurants and hotels going into liquidation, a phoenix coming out the other end, with the same management, using the same name, their directors having done nothing to comply with the law. The point is HMRC are often the biggest creditor in the liquidation, and over time they often become the biggest creditor of the phoenix company. HMRC are always looking for opportunities to increase the tax take, it’s only a matter of time before they use the breach of 216 to secure the recovery of tax from the phoenix should it get into difficulties, either if it should go into liquidation itself or the directors be asking for a time to pay agreement – why should HMRC give a company the opportunity to go into a TTP agreement with them when they can attack the directors personally for their debt? In my view, it’s only a matter of time before HMRC set up a department specifically to concentrate on this.
So what’s the law?
Section 216 Insolvency Act 1986 is very clear, there’s no uncertainty, there’s no maybe about it.
It starts off from the premise that a director of an insolvent company is prohibited from being involved in another company that uses the same or similar name as that being liquidated at any time in the next 5 years.
That name includes the formal name of the company and any trading names. And if the company is named after you, say it uses your surname, the fact it’s your name is irrelevant, you still cannot use it.
Being involved includes acting as a director, shadow director or working in the management of the phoenix.
The rules apply to people who have been a director or shadow director of the company being liquidated in the 12-months prior to its insolvency – so resigning does not enable you to get around the restriction.
The court will decide if the prohibited name is similar to the name of the company in liquidation. Often the decision will be blindingly obvious – for example re-using the name the pub’s been known as for the last 100 years – sometimes you’d like to think the court will give you some slack, it won’t. Changing the name from ‘Steel’, to ‘Steels’, ‘Steel stockholders’; from ‘Indian Restaurant’ to ‘Restaurant’; using only part, dropping or adding parts to an existing name, re-using generic names will not work – the court expects you to follow the process to get approval, not to simply assume you’re ok or to try to get around the rules by tinkering.
So what do you do?
There are three instances where you can be involved in a company with the same/similar name:
- Where the business and assets of the liquidated company are sold to another company with the same/similar name.This can happen where you buy the business and assets from an Administrator.Here you must give notice in the prescribed form to the creditors of the liquidated company, telling them of your intention to act in contravention of Section 216. You must also publish that notice in the London Gazette. And you need to do these things quickly, within 28 days of the sale. Fail to carry out any of these properly and within time, you’re not protected.
- You apply to court within seven business days of the start of the liquidation.If you apply so promptly, you can act in contravention of Section 216 until the earlier of six weeks and the date the application is heard. The application needs to be served on the liquidator to enable him to give his views.
- If the phoenix has been known by that prohibited name for 12 months prior to the liquidation and have been trading throughout that 12 months.
If none of the above instances apply, then you must to seek the permission of the court.
Your application must be served on the Secretary of State. The court will consider the evidence you and the Secretary of State presents and examine to what extent you were responsible for the previous company. In the period between the liquidation and the court hearing you must not assume approval will be forthcoming and must not act in breach of the rules – if you do, the court will not ratify that breach, you will be liable for the relevant debts.
Conclusion
These rules are often ignored and, if not, are so very easy to trip up over. The consequences of breaching the rules are so very punitive, with directors potentially being personally liable for tens, even hundreds, of thousands of pounds that directors are unwise not to follow them to the letter.
This means acting quickly and using solicitors experienced in such matters – if you would like me to introduce you to such lawyers, let me know.
There’s another point…
If you are now thinking about putting the phoenix into insolvent liquidation, having breached the rules over the re-use of names, you simply must think about the implications of the breach – it could not only see you banned as a director, you could also be made liable for some or all of the debts of the phoenix, thereby massively complicating the decision to liquidate.
Why do I say this?
Liquidators have a duty to investigate a company’s affairs with a view to ascertaining if action can be taken against you, or others, to enhance creditor realisations. This could lead to a misfeasance action against you personally, forcing you to pay money into the liquidation pot, reducing if not eliminating the debts that would otherwise be written off by reason of the liquidation. I always enquire about the history of the company and any predecessor when I sit with directors advising them of their options, but not all IPs do – and if they don’t, you could end up making the wrong decision, costing you massively.
Here’s a link to the government’s site for this. Please also read my other blog on this topic by clicking here.