If your company has gone into liquidation and you are in the process of setting up a new business, you may want to use the same or a similar company name. However, if you either act as director or are involved in the management of the new company with the same or similar name as the insolvent company, you run the risk of both civil and criminal liability if you don’t comply with the restrictions under the Insolvency Act 1986. Stephen Young looks at the specific of the legislation and what you can do to avoid falling foul of it.
Section 216 Insolvency Act 1986 restricts a director of an insolvent company from being involved in another company that either has the same name, or a name that is so similar that it suggests an association with the insolvent company. The restrictions prevent an individual from acting as a director, shadow director or in the management of the other company and last for five years. They apply if the individual was a director or shadow director of the insolvent company in the 12-month period prior to its insolvency.
The court will apply an objective test to determine if the prohibited name is either the same name or similar to the name of the company in liquidation. The penalties of breaching Section 216 are serious. Firstly, a director risks criminal liability that can include a fine, imprisonment or both. In addition, a director can be held personally liable for all “relevant debts” of the new company, namely all debts and other liabilities incurred at the time when the individual acts in contravention of Section 216.
Except in three situations detailed below, if an individual wants to act either as a director or be involved in the management of a limited company in contravention of Section 216, it is necessary to make an application to seek the permission of the court.
The application must be served on the Secretary of State and be supported with evidence explaining why consent to act is sought. In determining whether the director should be given permission to act, the court will examine to what extent the director was responsible for the failure of the insolvent company.
Pending the determination of the application, the individual should not act in a way contrary to Section 216 as the court will not ratify a breach that has already been committed.
There are three statutory exceptions to Section 216 that a director might be able to rely on, with the first two exceptions requiring prompt action to be taken by the individual director.
The first exception is where the business and assets of the insolvent company are sold to another company with the same or similar name to that with which the director is or intends to be involved. This could arise, for example, where the business and assets are sold by an Administrator prior to liquidation.
To take advantage of this exception, the director must give notice in the appropriate form to all creditors of the insolvent company of his/her wish to act in contravention of Section 216. The director must also publish that notice in the London Gazette. Both must be done within 28 days of completion of the sale of the assets.
The second exception will apply if the director makes an application to court for permission to act within seven business days of the liquidation. If a prompt application is made, the director can act in contravention of Section 216 for six weeks or until the application seeking permission to act is disposed of, whichever is the earliest.
The third exception applies if the successor company has been in existence, and known by that prohibited name, for at least 12 months prior to the liquidation of the first company. The company must have been trading during that period and not have been dormant for this exception to apply.
If a director of an insolvent company either wishes to continue to act as director or in the management of another company with the same or similar name to which Section 216 applies, it is important they seek early advice, particularly if they wish to take advantage of the statutory exceptions.
Members of the Keystone Restructuring and Insolvency Team regularly advise directors on the implications and risks of Section 216. Therefore should you require specific advice, please feel free to contact a member of Keystone Law’s team.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.