If you’ve been a director of a company that has gone into liquidation, you are bound by certain laws that govern your involvement with companies with the same or a similar name in the future. It is very important to be aware of these laws as contravening them is a criminal office punishable by prison, fines or both.
What is Section 216?
Section 216 of the Insolvency Act 1986 makes it illegal for any person who was a director of a company at any point in the 12 months before that company went into 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?
- Was the company you directed liquidated?
- 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 a period of five years from the date of the company’s 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. Additionally, section 217 of the act states that those found in breach of 216 will be personally liable for the debts and liabilities of the new company or business with the prohibited name for the period of time of their involvement with that company.
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 permission has been granted by the courts. The application for permission must have been made within 7 days of the liquidation, which will automatically grant temporary permission for a period of six weeks. There are rules governing which courts the application should be made to, so advice should be sought before this step is taken.
- 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 exception requires a notice in a prescribed form to be sent to all the creditors of the liquidated company and to be put in The Gazette within 28 days of the acquisition.
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 020 8444 2000 or use our Contact Us form.