Prohibited Names – A Minefield for Directors

The Use of a Prohibited Company Name Can Lead to Prison for the Director. Our Insolvency Practitioners Comment

Simon Parker, one of our London office-based Insolvency Practitioners, highlights the issues surrounding Phoenix Companies and Prohibited Names. If ignored by directors, the outcome could be a fine, disqualification as a director, imprisonment and personal liability for debts incurred during the time the prohibited name was used. He also looks at the three exceptions to the rules concerning Prohibited Company Names. If you are a director of a company facing insolvency and need clarification on this issue, please contact us.

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Directors Must Take Great Care When Setting up a New Company with a Similar Name

It is not unusual that when a business becomes insolvent, the directors will set up a new company to take over the business of the insolvent company. This new company will often have a similar name to, or even make use of, the old trading name in order to maintain the goodwill of the old business. However, great care needs to be taken by directors of an insolvent company if they are considering doing this.

This is because it is an offence under Section 216 of the Insolvency Act 1986 for a person who has been a director or a shadow director of a company in insolvent liquidation, within the period of 12 months ending on the day before it went into liquidation, to be for a period of 5 years, a director or involved in any way in the management of any other company or business carried on under or known by a prohibited name.

The purpose of these prohibited name provisions is to prevent phoenix companies from causing a disadvantage to creditors by creating greater transparency over the re-use of company names in such situations situations.

What is a Prohibited Name?

A prohibited name is defined as any name by which the liquidated company was known at any time in the 12 months prior to the liquidation, or any name so similar as to suggest an association with that company.

If, after insolvency, the Liquidator suspects the usage of a prohibited name, and an Insolvency Service investigation, the director(s) will receive initially a Re-use of Prohibited Name Warning Letter from Letter from HMRC , under Section 216 of the Insolvency Act. If proven, a fine or even a prison sentence can be the outcome. This restriction applies to both registered directors and people who have acted as a director.

In addition, section 217 of the Insolvency Act 1986 provides, amongst other things, that a person who is involved in the management of a company (or a person acting on instruction of someone) in contravention of Section 216 of The Insolvency Act 1986 is personally liable for the debts of the company that are incurred during the period of that involvement.

There are Three Exceptions

However, under the Rules 4.226 to 4.230 of the Insolvency Rules 1986, there are three exceptions to the restrictions imposed by Section 216 of the Insolvency Act 1986:

1. Prior Arrangement with the Liquidator. Where a company acquires the whole, or substantially the whole, of the business of an insolvent company under arrangements made by an insolvency practitioner acting as its liquidator, administrator or administrative receiver, or as supervisor of a voluntary arrangement.

Notice must be given to creditors and advertised in the London Gazette within 28 days of the acquisition. Great care should be taken here as notice should be given before the director involves him/herself in the phoenix company.

2. The Court Gives Permission. Where an individual affected by Section 216 applies for leave of the court to use the prohibited name. The application must be made within seven days of liquidation and the court must grant permission with six weeks. The time restrictions are therefore significant. The court takes these applications very seriously and may want to see evidence that the phoenix company has access to sufficient capital and is backed up by a strong financial team.

3. Existing Use. The court’s leave is not required where the company, though known by the prohibited name within the meaning of a prohibited name as defined by the Act, has:

a) Been known by that name for the whole period of 12 months ending with the day before the liquidating company went into liquidation and

b) Has not at any time in those 12 months been dormant.

Our Insolvency Practitioners Can Help

The use of these exclusions is not straightforward, nor is it easy to get court permission or obtain a prior arrangement with the liquidator. Directors should therefore seek insolvency advice by contacting or calling our insolvency practitioners in London on 0208 088 0633. The penalty for non-compliance could be a fine, imprisonment or both and in the case of section 217 personal liability.