Taking care with re-use of business name following insolvency
If you are a director of a company (or somebody who otherwise directs or controls it) which is going or has gone into an insolvency procedure, such as administration or liquidation, there may be a restriction on your involvement with another business trading under the same or similar name.
The restriction is set out in the Insolvency Act 1986 (section 216). Where a company goes into insolvent liquidation (which may sometimes follow an administration), someone who is a director of that company (or a "shadow" director, who otherwise directs or controls it) cannot (for a period of 5 years from the company going into liquidation) be a director or otherwise involved in the "formation, promotion or management" of another company or business operating with the same or similar trading name to that of the insolvent company.
The restriction protects anyone owed money by insolvent companies (creditors) and the general public from the negative effects of "phoenix" trading (where the trade of an insolvent company is resurrected (free from the debts) by the same management under the same or similar trading name). "Phoenix" trading is not illegal provided extreme care is taken and with the right professional advice. There are exceptions to the restriction which may allow those involved in the resurrection of the trade of an insolvent company to avoid liability.
Someone who breaches the restriction could have to pay a fine and may, in serious cases, be imprisoned. They may also become personally liable for the debts of the successor company which resurrects the trade of the insolvent company.
The Insolvency Service monitors breaches and the Department for Business Innovation and Skills brings claims against individuals in Court which may also include action for director disqualification.
The restriction forbids the re-use of a name (by the new trading entity) which is the same as that of the insolvent company or so similar so as to give rise to an association with it (e.g. if Joe Brown Technologies Limited goes into liquidation and trade is resumed by the same management operating as JB Technologies Limited, this would probably be caught by the restriction). We can tell you whether you are or would be caught by the restriction and if there is a way of avoiding liability.
You should take specialist advice as soon as you become aware that the restriction may be triggered. This may need to happen before the company has entered into administration or liquidation. There are certain "exceptions" that can apply to allow you to avoid liability if you are otherwise caught by the restriction. However there may only be a narrow window of time for the necessary steps to be taken. The exceptions will always depend on the specific facts and we can advise you on those.
First exception – Notice formalities
If the insolvent company is to go into administration and the whole (or substantially the whole) of assets are to be sold to another company after the administrators' appointment, a notice can be sent to all creditors of the insolvent company and advertised in a publication called the London Gazette (within 28 days of completion of the purchase) to enable you to avoid liability under the restriction. This notice is in a set form and refers specifically to the administration of the company and your acting (or intending to act) in a way prevented by the restriction by your involvement in the business of the insolvent company carried on under the prohibited name.
If the insolvent company is going (or has gone) into liquidation, the 28 days time window does not apply. These notice formalities must be dealt with before you become involved in the business trading under the prohibited name in order to avoid liability.
Second exception – Court permission
Alternatively, if the time has passed for dealing with the notice formalities, you can apply to the Court for permission to act as a director or otherwise be involved in a business using the prohibited name. The application must be made within 7 business days of the liquidation of the insolvent company. There is no guarantee that the Court will give permission and there will be additional costs involved. Our expertise and experience means that we can help you put the best case to the Court when making the application.
Third exception - Existing name use
Where the prohibited name of the insolvent company has been used by another trading company (during the 12 month period prior to the liquidation of the insolvent company) and that successor company hasn't been dormant in that period, those individuals who were directors or shadow directors of the insolvent company (and now involved in the "promotion, formation and management" of the successor company) would not be liable under the restriction.
This is helpful in circumstances where the successor company has acquired the business and assets of the insolvent company through a "pre-pack" administration and the insolvent company doesn't move from administration into liquidation during the 12 months period after completion of the "pre-pack".
Sometimes the new entity will need to stop trading under the "prohibited name" or find a new trading style. This might be because the time for dealing with the notices or making a Court application has passed and the directors and management are at risk of liability by continuing as they are. This is an option of last resort and advice should be taken.
Practical advice following administration
In most cases, where the insolvent company has gone into administration and its business and assets have been sold to another company, the notice formalities can be dealt with within 28 days of completion. Otherwise, you will need warning of the insolvent company moving from administration to liquidation so that a Court application can be made at the relevant time or for the successor company to stop using the "prohibited name" before liability is triggered on the insolvent company's liquidation. You will need the administrators' agreement to warn you so that you don't accidentally fall foul of the restriction.
We have extensive expertise in this area and we are happy to discuss a matter before you incur legal fees. We would always seek to give you an initial steer as to what work would need to be done and the likely costs involved.