Colin McIntosh, partner at Brodies LLP, explains the restrictions on reusing a company name after liquidation.
The oft-quoted ‘A rose by any other name would smell as sweet’ may give the impression that names aren’t that important. But where a business is concerned, this is far from the truth.
So for a company owner, what is, or could be, in a name? How about the possibility of imprisonment or a fine, or both? How about the exposure to potential personal responsibility for the debts and other liabilities of a company? Perhaps not quite as sweet smelling as that famous rose.
When is a name is prohibited?
Section 216 of the Insolvency Act 1986 places certain restrictions on a person who was a director or shadow director of a company (the liquidating company) at any time in the period of 12 months prior to that company’s insolvent liquidation (the 12 month period).
Except with the leave of the court, such a person shall not at any time in the period of 5 years beginning with the date of liquidation of the liquidating company:
- be a director of any company that is known by the ‘prohibited name’
- be concerned in the promotion, formation or management of any company under a prohibited name
- in any way be concerned or take part in the carrying on of a business carried on (otherwise than by a company, such as a partnership or sole trader) under a prohibited name
For the purposes of Section 216, a name is a prohibited name if:
- it is a name by which the liquidating company was known at any time in the 12 month period
- it is a name which is so similar to such a name as to suggest an association with the liquidating company
References in Section 216 to a name by which a company is known are to the name of the company at that time, or to any name under which the company carries on business at that time. The restriction therefore does not apply only to registered names.
The consequences of contravention
As mentioned above, if a person acts in contravention of Section 216, they are liable to imprisonment or a fine, or both. In addition, Section 217 of the act provides that such a person is personally responsible for all the debts and other liabilities of the ‘new’ company as are incurred at a time when that person was involved in the management of the new company.
Section 217 goes even further and imposes personal liability for certain debts and liabilities of the new company on a person who is involved in the management of the company, who acts or is willing to act on the instructions given by a person whom he or she knows at that time to be in contravention of Section 216.
The mischief that Section 216 seeks to address is ‘phoenixism’; that is, the practice of making a business insolvent in order to evade paying debts and then setting the business up again under a new name. The penalties and protections afforded by these provisions may be seen in many circumstances as well founded. However, Section 216 does not provide an absolute prohibition, and leave of the court can be sought and obtained in certain circumstances.
In addition, the insolvency rules applicable to both English and Welsh, and Scottish registered companies, provide certain exceptions to the prohibition against reuse of a registered or trading name.
Exceptions to the ban
Although the Insolvency Rules 1986 and the Insolvency (Scotland) Rules 1986 each have different provisions regarding these exceptions, the general aim, and drafting, of each is very similar.
The first exception relates to situations in which a company acquires the whole, or substantially the whole, of the business of an insolvent company, under arrangements made by an insolvency practitioner appointed to it. In order to obtain the benefit of this exception, notices in prescribed form must be sent to all the creditors of the insolvent company and also published in the prescribed Gazette within 28 days of the date of acquisition from the office holder (see How to place a notice in The London Gazette).
The second exception applies for a limited maximum period of 6 weeks, in the event that application for leave under Section 216 is made within 7 days of the liquidating company entering liquidation.
The third exception applies where a prohibited name has been used by a company for the period of 12 months ending with the day before the liquidating company went into liquidation, provided that that company has not been dormant at any time in that 12 month period. This deals with groupings of companies with the same or similar names (such as X Limited , X (No 1) Limited etc), so that liquidation of one member of a group will not result in all other companies in that group losing the right to use their respective names if they meet the relevant criteria.
If in any doubt, specific legal advice should always be obtained, lest that sweet smell turns into a thorny issue. As with most matters involving insolvency, if a Scottish registered company and/or insolvency is involved, then Scottish courts, rules and procedures will be relevant and Scots law advice should be obtained.
Find out more: Insolvency: restrictions on re-use of a company name
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