Section 216 of the Insolvency Act 1986 places restrictions on a director of an insolvent company from being a director of a similarly named company for 5 years.
The purpose behind section 216 was to prevent cases of ‘phoenix syndrome’ where a director of a failed company could set up a similarly named new company and continue trading without due regard to the creditors left behind.
Who is caught?
If a person was a director or a shadow director of a company at any time in the 12 months prior to the company’s liquidation, then such person is prohibited for a period of five years from:
- being a director of any company with a name used by the liquidated company at any time in the 12 months period to its liquidation or a name which suggests an association with the liquidated company; or
- in any way promoting, forming or managing a company with such a name; or
- in any way taking part in the business of a company with such a name.
What are the consequences?
A person found to be contravening section 216 could face imprisonment and a fine and may, if they are involved in the management of the new company, be personally responsible for the debts the new company incurred whilst they were involved in such management.
Further still, a person involved in the management of the new company could be held personally responsible for the debts of the new company if they act on the instructions given by a person whom they know is caught by section 216 of the Insolvency Act.
Given the serious consequences of disobeying section 216 it may be sensible for a person caught by the provisions to change the name of the new company completely, but some may not be so readily willing to make this decision. Intellectual property, goodwill, reputation and brand recognition are just a few examples of the intangible qualities which are all captured by the company’s name.
Thankfully, there are a few ways to keep it, by taking advantage of some exceptions to the section 216 prohibition.
The First Exception
On the basis that, under arrangements with the liquidator or administrator, you acquire the whole or substantially the whole of the business and assets of the insolvent company you can use the otherwise prohibited name if you serve notice in the prescribed form.
The prescribed form of the notice must be given to every creditor who is known to you or is ascertainable by reasonable enquiries and published in the Gazette no later than 28 days after the completion of the arrangements with the liquidator or administrator.
For more information in relation to the existing management buying the business and assets of an insolvent company, please see here.
The Second Exception
You can use the prohibited name for a limited time of up to 6 weeks starting from the day on which the company goes into liquidation if you apply for permission by the court to use the prohibited name within 7 days of the company going into liquidation.
Essentially, you can use the prohibited name whilst the court considers your application but using the prohibited name after the 6 weeks is subject to the court’s decision.
The Third Exception
Permission is not required by the court where the company whose name would be a prohibited name was known by that name for the entire 12 month period prior to the failed company going into liquidation and has not been dormant at any time in that 12 month period.
This exception is mostly to prevent a group of companies with connected names from falling foul of section 216.
For example, if Passmore (Tunbridge Wells) Ltd, Passmore (Dartford) Ltd and Passmore (Kent) Ltd were a group of companies and Passmore (Kent) ltd went into insolvency, then the other two would not have to change the Passmore part of the name as long as they were trading and known by those names for the year before the liquidation of Passmore (Kent) Ltd.
If one of the exceptions applies then the persons caught by section 216 will avoid imprisonment, fines and being personally liable for the new company’s debts.
If you are looking for legal advice in this area of law, please get in touch with our Corporate and Commercial department to see how we can help.