Section 216 (“s216”) of the Insolvency Act 1986 (“the Act”) restricts the directors of a company that has entered insolvent liquidation from reusing the company’s name, or any similar names, for period of five years following the date of liquidation.
When Does Section 216 Apply?
Section 216 applies where:
- A company goes into insolvent liquidation;
- A person was a director or shadow director of that company at any time in the 12 months prior to the commencement of liquidation;
- That person is involved in the promotion, formation or management of a company with the same or a similar name to the liquidated company.
This means that the s216 restriction applies even if:
- The person was not formally appointed as a director, but acted as a de facto or shadow director by being involved in directing the company’s affairs; and/or,
- The person resigned before the company went into liquidation but acted as a director at any point within the preceding 12 months.
It is also important to note that s216 can also apply where a company enters into a company voluntary arrangement or administration and then subsequently goes into liquidation.
What is a ‘Prohibited Name’?
A ‘prohibited name’ is any name by which the liquidated company was known during the 12 months before liquidation, including trading names, abbreviations and nicknames, or any name so similar that it suggests an association with the former company. It is more than just the registered name and can extend to logos and get up. For example, if a company is registered as ’ABC Builders Limited’ but commonly referred to or known as ‘ABC’, names using ‘ABC’ and referencing building work, (such as construction or contracting) will be prohibited.
This restriction applies to a director using a prohibited name when operating through a partnership or trading as a sole trader. This can cause particular problems where the prohibited company name is also the name of the director.
What is the Purpose of Section 216?
“Pheonixing” is a practice whereby directors liquidate their company to avoid paying creditors then start a new company that benefits from the goodwill of the former company but free of its liabilities. The s216 restriction is in place to prevent this behaviour and protect the creditors of the insolvent company. The purpose of the law is to promote transparency. It alerts creditors, customers and stakeholders of the director’s connection with the insolvent company so they can make informed decisions about whether to interact with the new business.
What are the Consequences of Breaching Section 216?
A breach of s216 can include personal liability of the defaulting director for the debts of the new company, a fine and/or imprisonment. A director who is found to be in breach of s216 may also face disqualification from acting as a company director.
Under section 217 of the Act (“s217”), an individual who is involved in the management of a company, (directly or indirectly), known by a prohibited name, will be personally liable on a joint and several basis for the “relevant debts” of the new company if they act on the instructions of someone that they know to be in contravention of s216. The scope of the “relevant debts” is dependent on the role individual’s role within the new company using the prohibited name. If a defaulting director, it will be all debts incurred in the period that they were involved in the management of the company. If a person acting on a defaulting director’s instructions, it will be limited to the period they acted on those instructions.
A breach of s216 automatically occurs at the point of the prohibited conduct takes place. I.e. the new company does not have to be trading using the prohibited name. The Court has no discretion to limit the directors’ liability and ignorance does not provide a defence.
Exceptions
There are limited exceptions to the rule contained in rule 22 of the Insolvency (England and Wales) Rules 2016 (“the Rules”).
Under rule 22.4, a notice can be given to creditors of the insolvent company informing them that the director/s intend to be involved in a company using the same or similar name. This requires the new company to purchase the ‘whole or substantially the whole’ of the old company’s business. Prescribed notices need to be given to every creditor of the liquidated company within 28 days of completion of the sale, in the prescribed form and by publication in the London Gazette.
The second exception is contained in rule 22.6 where an application for permission to act as a director the new company can be made to the court within 7 days of the liquidation.
The third exception permits a director’s involvement in a company that was already trading under the same or similar name before the insolvent company entered into liquidation. This is contained in rule 22.7 of the Rules. The exception requires proof that the company with the same or similar name has been known as that name for the entire 12 months prior to liquidation and was not dormant during those 12 months.
How we Can Help
If you find yourself in a situation where you may be in breach of s216 of the Act and you would like more information, please reach out to our team [email protected].
This article co-written by Rachel Western, Paralegal, and Andrew Knox, Partner in our Restructuring and Insolvency team.