It is often the case that when a company is liquidated and a phoenix has taken place a ‘new company’ will be established and will seek to use the name of the ‘old company’. There are many benefits to re--using a company name for example; the old company may have established a strong brand and reputation, which the new company can capitalize on without incurring additional advertising costs. However, Section 216 of the Insolvency Act 1986 states that once the old company has been liquidated the old company name becomes ‘prohibited’ and cannot be used again. The below information takes you through the law governing the use of ‘prohibited names’ and the exceptions that allow the use of a prohibited name.
Prohibited Name
According to Section 216[2] of the Insolvency Act “A name is a prohibited name in relation to such a person if it is a name by which the liquidating company was known at any time in that period of 12 months [prior to the date of liquidation]”. This definition encompasses the name by which the old company was registered at Companies House, its trading name, or any name that is sufficiently similar to simply associate with the former company.
Restrictions
It is important to understand that restrictions to the use of a prohibited name do not apply to a company name per se. The insolvency Act states “the present section [216] is not directed against the re-use of an insolvent company’s name in itself: there will be no bane on this practice provided that no director of the former company is associated with the second business. It is only directors who can contravene the section, and only directors who are liable to punishment.”
The restriction enforced by section 216 is that no director or shadow director of the former company can partake in the formation, promotion or management of the new company using a prohibited name for a period of five years. For example, John Smith Ltd, before it went into insolvent liquidation, may have used the trade name of City Autos. It will be an offence for a former director of the company to take part in the management of any business using the name John Smith or City Autos, or any name similar to either. It will also be an offence for him to be a director of any company having the registered name John Smith Ltd or City Autos Ltd and also of any other, X Ltd if it trades under John Smith or City Autos – a similar name in each case.
It should be noted that under Section 217 on the Insolvency Act 1986 the restrictions on the use of a prohibited name are widened. Any person managing a company under the instruction of a person whom they know to be in contravene of Section 216 may be liable for any relevant debts under Section 217.
Penalties
To breach Section 216 or Section 217 of the Insolvency Act 1986 is to commit a criminal offence, which may be punishable by fines, imprisonment or both. It goes without saying that if you are found to be in breach of Section 216 you will be liable for any relevant debts of the company.
Exceptions to Section 216
Within Section 216 there are 3 exceptions whereby a director may use a prohibited name without being in contravene of Section 216. However, in some cases, the judicial precedent has dramatically altered their effectiveness.
- Previous Use of Name: If another company has used a prohibited name for at least 12 months prior to the date of liquidation and has not been dormant at any time during those 12 months, then that company can continue to operate under a prohibited name.
- Sale of the Business: Prior to 2004 it was understood that under rule 4.228 of Section 216, a director or intended director of a company may use a prohibited name if he/she purchased the whole or substantially the whole of the business from the liquidated company under arrangements with the administrative party. This exception is equivalent to buying the ‘goodwill’ of the liquidated company. In respect to this exception, it was commonly thought that the only requirement of a director or intended director was to inform its creditors that they may be taking directorship of a new company under a prohibited name. A notice would also need to be placed in the London Gazette using a specific form [form 4.73].
Since the case of Churchill & Anor vs. First Independent Factors and Finance Ltd in 2004, the requirements of the director or intended director seeking an exemption from rule 4.228 through the sale of business have become somewhat more complex. The appellants, Eric and Peter Churchill, who are brothers, were directors of a company called Arctic Distribution Ltd (“the old company”) when it went into insolvent liquidation on 3 July 2001. As at that date, they were also directors of another company, Arctic Distribution (2001) Ltd (the new company), and thereafter they continued to act as such. By a Sale Agreement dated 18 October 2001, the old company (acting by its liquidator) sold its goodwill to the new company. The appellants argued that they had informed all creditors of the old company under rule 4.228 and were therefore not in breach of the Rule. However, the respondents First Independent Factor and Finance Ltd argued such notice would not, on the true construction of the rule, have operated to relieve the appellants from liability for the sum claimed as notice could not be given in retrospect in regards to individuals who were already directors of the successive company.
The crux of the case focussed around a particular passage of Section 216, which states “The notice may name a person to whom section 216 may apply as having been a director or shadow director of the insolvent company, and give particulars as to the nature and duration of that directorship, with a view to his being a director of the successor company or being otherwise associated with its management.” HHJ Mitchell found that the term “with a view to” clearly implied a prospective nature dismissing the appellant’s case, as they were already directors of the new company when notice of their intentions was given to creditors. The appellants argued that the term ‘may’ implied the discretion of the directors but HHJ Mitchell dismissed this.
The decision has clarified the requirements of the directors when seeking exemption of Rule 4.228 through the sale of the business. Intended directors must:
- Acquire the business from the liquidator (because it is only in such circumstances that the Rule 4.228 exemption applies);
- Give individual notice to all the creditors on form 4.73;
- Ensure the notice is compliant in detail, specifying his name, the insolvent company’s name and number and the prohibited name;
- Give and publish the notice before forming or being involved with the new company.
Permission of the Courts
A director or intended director may apply for the permission of the court to use a prohibited name. An application must be made within 7 days of the date of liquidation. The application can be made to any court with the jurisdiction to wind up a company although if a particular court wound up the company then the application should be made to that court. If you apply to the court to use a prohibited name a copy of your request should be sent to Hotline and S216(3) Applications Team, 3rd Floor Cannon House, 18 Priory Queensway Birmingham B4 6FD. This is because the court may call on the liquidator, or any former liquidator to inform them of the circumstances of the liquidation. Once your application has been made a 6-week grace period will be applied whereby the director may operate a company under a prohibited name. This grace period will end after 6-weeks or if the court dismisses the application, whichever comes first. It is therefore essential to have the case heard within the 6-week period.
It is in the discretion of the court to grant permission to use a prohibited name and as such the result of a court application is uncertain. The court is likely to grant dispensation when the insolvency is not linked with any blameworthy conduct on the part of the director concerned. Re Bonus Breaks Ltd [1991] is an illustration of such a case. There, the applicant had been a director of a company, which had gone into insolvent liquidation, but she had not behaved culpably and had lost substantial sums of her own money. Morritt J gave leave for her to be a director of the new company against undertakings that its capital base would be maintained and that it would not redeem any redeemable shares nor purchase its own shares out of distributable profits for a period of two years, unless such action was approved by a director independent of the company’s founders.