If you’ve been a director of a company that has gone into insolvent liquidation, you are bound by rules that govern your involvement with companies of the same or a similar name afterwards. Insolvent liquidation has a statutory meaning: the company goes into liquidation at a time when its assets are insufficient to pay its debts, its other liabilities and the costs of the winding up. In practice that is a creditors’ voluntary liquidation or a compulsory liquidation. A genuinely solvent members’ voluntary liquidation falls outside it — but the test is the company’s actual position, not the label on the procedure, so an MVL that turns out not to cover its debts is not a safe assumption. Breaching the rules is a criminal offence punishable by a fine, imprisonment or both, and it carries personal liability for the new company’s debts.
What is Section 216?
Section 216 of the Insolvency Act 1986 makes it an offence for any person who was a director of a company at any point in the 12 months ending with the day before that company went into insolvent liquidation to be involved in another company with the same or a similar name for a period of five years. These laws also apply to shadow directors (those acting in the role of directors who are not formally appointed as such).
Preventing Phoenix Companies
The legislation was created to stop directors from liquidating insolvent companies and then starting up a company with the same or a similar name to stand in the place of the original liquidated company. Were it permitted, this so-called “phoenixism” would allow companies to liquidate and evade paying outstanding creditors in full and then simply start a new company to carry on as before.
When Does Section 216 apply?
If you want to know whether this affects you, the simplest way is to ask yourself the following questions:
- Have you been a director or a shadow director of a company?
- Did that company go into insolvent liquidation, meaning a creditors’ voluntary liquidation or a compulsory liquidation? A genuinely solvent members’ voluntary liquidation does not, though one that turns out to be unable to pay its debts in full may.
- Were you the director or the shadow director in the period of 12 months before the company’s liquidation?
If the answer is yes to all of the above, Section 216 will apply to you. It stipulates that you cannot direct, form, manage or promote a company or take part in an unincorporated business with the same or a similar name to that of the liquidated company’s. This prohibition lasts for five years from the date of the insolvent liquidation.
The reference to the liquidated company’s name can mean any name under which that company carried on its business, so the laws cover the liquidated company’s trading names as well as its registered name.
Penalties for Inappropriate Reuse of a Company Name after Liquidation
As mentioned before, contravention of section 216 is very serious as it is a criminal offence. Those who fail to comply with the section face a fine, a term in prison or both. Section 217 adds personal liability. A person in breach of section 216 is personally responsible for the relevant debts of the company or business carrying the prohibited name, jointly and severally with it, for the period of their involvement. So does anyone who acts on the instructions of a person they know to be in breach.
Exceptions
There are three exceptions to section 216.
- Where the other company or business had already been using the name for a period of 12 months prior to the liquidated company’s liquidation. The company requiring permission cannot have been dormant at any point during this 12 month period.
- Where the court has given permission. Under rule 22.6 of the Insolvency (England and Wales) Rules 2016 the application must be made not later than seven business days from the date the company went into liquidation. Made in time, it carries temporary permission to act, running from the date of liquidation until six weeks after that date or until the court decides the application, whichever comes first. Seven business days is not seven days, and the difference is usually the difference between having the protection and not. There are also rules about which court to apply to, so take advice before you file.
- Where the business or assets of the liquidated company were sold to the new company or business by a licensed insolvency practitioner (the liquidator). This is the rule 22.4 exception. It requires a notice in the prescribed form to be given to every creditor of the insolvent company and published in the Gazette no later than 28 days after the arrangements are completed. The notice has to be out before you act under the name, so it is not a formality to attend to afterwards.
Do you Have a Potential Problem with s216?
If you are in the position where you are looking to liquidate a company and use the company name afterwards, this is possible. However, it is very important that you ensure it is carried out in such a way as to fall within the exemptions. As we are licensed insolvency practitioners at AABRS® , we have significant experience in dealing with situations where s216 might apply and helping directors find the appropriate solutions.
The most practical solution is to use the third exemption, but this needs to be implemented carefully to ensure the requirements are met. These requirements include the drafting and publication of the notice, circularisation of the notice to creditors and in addition consideration of when you are able to become a director of the new company. We can assist in advising you on your duties in this process and help you to protect your personal interests.
Need advice? This is a tricky area and the penalties can be very severe – if you want to discuss this with us please call us on 0208 444 3400 or use our Contact Us form.