The dangers of using a same or similar name of an insolvent company
There are many complex issues that can arise out of the decision to use the same or a similar name to an insolvent company, also known as using: “prohibited name”. Doing so incorrectly can lead to a fine, imprisonment, or both; as well as personal liability for Directors. The Insolvency Team at Bradley Haynes Solicitors explains how to navigate the pitfalls and the Insolvency Rules to safely reach the other side.
INTRODUCTION
If you are a director of a company that has gone into insolvent liquidation (“Oldco”) and are considering setting up a new company (“Newco”) with a same or similar name to that of a company that has gone into insolvent liquidation you must be careful of the law governing this area. The law imposes certain restrictions on the re-use of a same or similar name. These are set out in Sections 216 to 217 of the Insolvency Act 1986 (“IA 1986”) and rules 4.226 to 4.230 of the Insolvency Rules 1986 (“IR 1986”). This article will deal with what restriction are imposed, what happens if there is breach and the exceptions that might be available to use which otherwise would be considered as a prohibited name.
WHAT IS THE RESTRICTION?
Section 216 of the Insolvency Act 1986 imposes restrictions on the re-use of a prohibited names. This prohibition applies to both incorporated and unincorporated companies.
If the Oldco has gone into insolvent liquidation and a person is a director or a shadow director in the last 12 months before the company went into liquidation, they cannot be a director for a period of 5 years from the date when the company entered liquidation or be involved in the “formation, promotion, management” of a Newco that is using a same or similar name to the Oldco, except with the permission (referred to as “leave” of the court). The re-use of a same or similar name is otherwise known as a “prohibited name”.
WHAT IS THE PURPOSE OF SECTION 216?
This section was enacted to prevent and restrict directors of an insolvent company creating a “Phoenix Phenomenon”
CONSEQUENCES FOR BREACHING THE PROVISIONS OF SECTION 216?
Breach of section 216 IA 1986 carries both criminal and civil liability. The criminal liability is set out in in section 216 (4) of 1A 1986 which carries imprisonment or a fine, or both. Whereas, the civil liability is referred to in section 217 1A 1986 which will impose personally liability for the debts of the Newco.
ARE THERE ANY EXCEPTIONS TO THE RESTRICTIONS?
Yes, there are three exceptions to this restriction. These exceptions are set out in rules 4.228 to 4.230 of the IR 1986.
- 228 IR 1986 – This first exception deal with the transfer of the business. This arises
“where a company (“the successor company”) acquires the whole, or substantially the whole, of the business of the insolvent company, under arrangements made by and insolvency practitioner acting as its liquidator, administrator, or administrative receiver or as supervisor of a voluntary arrangement…”
Please note there is a strict time limit imposed under this Rule. A notice must be sent to each individual creditor of the Oldco and the same must be advertised in the London Gazette within 28 days of completing the purchase of the name and the assets of the Oldco. The notice to creditors must be on a prescribed form 4.73.
- 229 IR 1986 – This is the second exception deal with applying to Court for permission where the notice time as referred to above has expired. The directors of the Newco can seek leave (referred to as permission) from the Court by making an application to act as a director using the prohibited name. Again, time limit is strict as the application must be made within 7 days of the company going into insolvent liquidation, if the Court does grant that permission it has to be within 6 weeks from that date. Before the Court grants leave there are various factors that must be taken into account
- 230 IA 1986 – This third exception deals with when leave of the Court not required as follows:
“(a)has been known by that name for the whole of the period of 12 months ending with the day before the liquidating company went into liquidation, and
(b)has not at any time in those 12 months been dormant within the meaning of section 252(5) of the Companies Act.”
An example of this would be if you have three different companies which have similar names and one of the three companies has gone into liquidation, the other companies with the similar name can continue to trade providing they have used than name for at least 12 months.
It is therefore recommended advice should be sought before setting up a Newco with a same or similar name to avoid that liability.
We have experienced team members who can provide the necessary advice. For further information, please contact one of our team members: Andrew Bradley, Jonathan Bustin or Shakira Zaman on: 01905 900 919 or email us at: welcome@bradleyhayneslaw.co.uk
DISCLAIMER
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at 3 February 2017. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.