Do you run the risk of trading under a prohibited name after liquidation?
If you have acted as a director of a company that goes into insolvent liquidation (the “liquidated company”) at any time in the 12 months prior to the liquidation, then you will need to be aware of Section 216 of the Insolvency Act 1986. That section prohibits you from acting as a director of a company or becoming involved in the formation, management or promotion of a business (the “successor business”) using a name similar to the name of the liquidated company for a period of 5 years beginning with the day on which the company went into insolvent liquidation. The section is wide and includes sole trader businesses and trading names. The prohibition extends to anyone who is acting in the promotion, formation or management of the successor business even if they are not listed as a director. No issue arises under section 216 if the successor business uses a completely different name.
The penalties for breach of the prohibition are serious. The person breaching the section can be liable to imprisonment or a fine or both. In addition, they can be personally responsible for all the relevant debts of the successor business. It goes further to catch anyone (not otherwise caught) who knowingly accepts instructions from somebody who they know would be prohibited under section 216. In those circumstances, that person too can be liable for all the debts of the successor business.
There are, however, three exceptions to the above draconian provisions. These are contained within Part 22 of the Insolvency Rules 2016.
This article concentrates on the first exception but for completeness the two others cover the following circumstances. The second exception is where the person to whom Section 216 applies makes an application to court seeking permission to act as a director of the successor business within 7 days from the date the liquidated company went into liquidation. That person may then act in contravention of Section 216 for a period of up to 6 weeks or until the court disposes of the application, whichever of those occurs first. The third exception is where the successor business has been trading for 12 months using the prohibited name prior to the liquidated company going into insolvent liquidation.
Turning to the first exception, this is perhaps the most useful and the most straightforward. The first exception provides that an individual may act in contravention of section 216 and be a director or be involved in the promotion, formation or management of a business that uses a prohibited name provided he/she (a) purchases all or substantially all of the assets of the liquidated company from the liquidator (or administrator/CVA supervisor before liquidation) for the purposes of carrying on its business and (b) sends notice to creditors and publishes a notice in the London Gazette within 28 days of the completion of the arrangements. Unlike a court application, there is no scope for creditors to object to the notice being given and provided it is done correctly, the director of the liquidated company can then act as a director or be involved in the promotion, formation or management of the successor business using the same or a similar name.
One little publicised change in the Insolvency Rules 2016 is that the notice to creditors and the notice that appears in the Gazette must now be substantially longer. In particular, the notice must include a statement as to the effect of the notice as contained in Rule 22.5.
The notice cannot be given by somebody who has already acted in breach of Section 216. Therefore, if the liquidated company goes into liquidation on the Monday, the assets are purchased by the former director on the Tuesday, and the director then trades the successor business for a couple of days using a prohibited name, he cannot then give notice to creditors. This is because by trading on the Wednesday and Thursday using a prohibited name, he would already have breached Section 216. If this occurs, then a director can still take advantage of the second exception and make an urgent application to court within 7 days of the liquidation.
If he fails to do so, then as the director has already breached Section 216, he will be facing the risk of criminal and possibly civil liability.
If you are a director of a company facing liquidation and wish to continue trading under a name that is similar or the same as the liquidated company, then you should seek advice as early as possible. Often, we are consulted too late when a director is already out of time to take advantage of the notice provisions and is thus forced to make an application to court, which by its nature has more of an uncertain outcome.
If you wish to trade under a name that may be prohibited after liquidation, then do get in touch with us on 0207 353 1000 and ask to be put in touch with one of our solicitors with specialist expertise in this area. Alternatively, email email@example.com with your contact details and we will arrange for you to be called back. There is no charge for this initial contact.
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.