If you were a director or shadow director of a company at any time in the 12 months before it went into insolvent liquidation, you are bound by rules that govern your involvement with companies and businesses 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. It also makes you personally liable, jointly and severally with the new company, for the debts it incurs while you are involved in its management.
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 act as a director of, or be involved in the promotion, formation or management of, another company with the same or a similar name for five years. It also covers taking part in a business run under that name other than through a company. The court can give permission, and there are exceptions, set out below. 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 into liquidation at a time when its assets were not enough to pay its debts, its other liabilities and the costs of the winding up? That is usually a creditors’ voluntary liquidation or a compulsory liquidation. A genuinely solvent members’ voluntary liquidation does not count, 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, unless the court gives permission or one of the exceptions below applies, you cannot direct, form, manage or promote a company or take part in an unincorporated business with a prohibited name. A prohibited name is a name the liquidated company used at any time in the 12 months before it went into liquidation, or one so similar as to suggest an association with that company. This prohibition lasts for five years from the date of the insolvent liquidation.
The liquidated company’s name includes any name under which it carried on business at any time in the 12 months before it went into liquidation, so the rules cover its trading names from that period 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, jointly and severally with the company, for the debts of the company carrying the prohibited name that it incurs while they are involved in its management. So is anyone involved in the management of the company who acts, or is willing to act, on instructions from a person they know to be in breach, for the debts the company incurs while they do so.
Exceptions
There are three exceptions to section 216.
- Where another company has been known by the name for the whole of the 12 months ending with the day before the liquidated company went into liquidation, and was not dormant at any time in that period. This exception covers only a company. It does not cover a business run by a sole trader or a partnership.
- Where the court has given permission. You can apply for permission at any time, and you must give the Secretary of State at least 14 days’ notice of the application. Under rule 22.6 of the Insolvency (England and Wales) Rules 2016, only an application made not later than seven business days from the date the company went into liquidation lets you act before the court decides. 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. Made later, it gives no temporary permission, so this route gives you no protection until the court grants permission. 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 whole or substantially the whole of the liquidated company’s business is acquired under arrangements made by its liquidator, or made before the liquidation by its administrator, administrative receiver or CVA supervisor. A purchase of some of the assets is not enough. This is the rule 22.4 exception. It requires a notice, with the contents set out in rule 22.4, to be given to every creditor of the insolvent company whose name and address is known or can be found by reasonable enquiries, and published in the Gazette. The notice can be given before the arrangements are completed, and no later than 28 days after they 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.