3 Mins
Companies can face insolvency for all sorts of legitimate reasons. In this circumstance, if they want to, directors can set up a new company to carry on a similar business, providing they are not personally bankrupt or have been disqualified to act as a director. However, they cannot use the same company name, or one so similar that it suggests an association, as insolvency law restricts the use of the insolvent company’s name.
As the name suggests, a phoenix company is a term used to describe another company that rises from the ashes of an insolvent one. Phoenixing is the practice of transferring an insolvent company’s business to a new business thus carrying on trading but leaving the debts behind. The insolvent company often then enters into liquidation or is eventually struck off.
There have been instances, hopefully now in the past, of directors who are serial phoenixers, setting up new companies repeatedly, to leave the debt in the old companies. Customers and creditors are often not aware they are trading with a new company as they are dealing with the same people and the company names are so similar.
Sections 216 and 217 of the Insolvency Act 1986 address this problem by restricting the re-use of insolvent company names.
S. 216 :
- Applies to persons who were directors, or shadow directors, in the 12 months prior to the company going into insolvent liquidation.
- The name is prohibited if it was the name the liquidated company was known by during those 12 months or is so similar that it suggests an association
- Unless permission is granted, following application to Court, the person cannot directly or indirectly be associated with another company known by a prohibited name for 5 years from the date of liquidation.
S. 217 sets out the consequences. A person who has contravened S. 216 and is involved in the management of the company can be held personally responsible for all the debts and other liabilities of the company incurred during their involvement. This is joint and several liabilities with any other liable person. And for those who think they will get around this by acting as a shadow director, the same penalties apply to anyone who acts on their instruction in the knowledge that they are circumventing the use of a restricted name, so both parties will then be liable.
In addition, the person could be prosecuted and if convicted, imprisoned and/ or fined, may be disqualified as being a director and may have assets confiscated as proceeds of crime.
The restricted name is not confined to the company’s registered name but also includes trading names, brand names, registered trademarks, and as previously noted, any name so similar that it suggests an association with the liquidated company.
There are three exceptions to this rule
- The name may be used if the insolvent company is sold by the Liquidator/ Administrator, and you give the required legal notice that you intend to be a director or involved in the management of the business using the prohibited name.
- You can apply to the court for permission to use the name. This must be done strictly within 7 business days of the company going into liquidation.
- If you are already involved with a company which has been trading and using the same or similar name continuously for at least 12 months immediately prior to the date of liquidation
Further details can be found on the government website.
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