Can I re-use my company’s name following liquidation?
Having shared the ins and outs of a director changing their name to avoid a disqualification, a similar situation occurred to me which happens and that is the re-use of a company name following liquidation, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency
If I place my company into liquidation, can I still be a director of another company?
The answer to this is very much, yes. There is a relatively common misconception that if a director is appointed in relation to a company which is placed into insolvent liquidation, they cannot act for another. This is incorrect, and unless they are disqualified (by order, undertaking, bankruptcy or Debt Relief Order) from acting, there are perfectly entitled to act as director for any number of other companies.
Are there any director restrictions following liquidation?
Yes. While there is no prohibition, there are certain restrictions. Arguably the most important of these is a prevention on the re-use of company names pursuant to Section 216 of the Insolvency Act 1986.
This provision applies to any director who has served within the 12 months prior to insolvent liquidation, and includes ‘shadow directors’ i.e. anyone who is acting in the capacity of a director, or any person on whose instructions a director is accustomed to act, regardless of whether they appear on Companies House or not.
What is the director precluded from doing?
Any person to whom the restriction applies is prevented for a period of five years from the date of liquidation, from being a director of a company with a name which is so similar to the name of the company in liquidation, as to suggest an association with that company.
They are also precluded from, in any way, being concerned or taking part in the promotion, formation or management of any company (-- regular readers will recognise this as being similar to the wording of disqualification orders), or any business other than a company, with a similar name. For example a sole trader or partnership.
What is the rationale for this?
The idea of the restriction is to prevent newly formed businesses (perhaps which have acquired assets from the liquidated company) from trying to benefit from the perception of a longer period of historic trading than it has, which may carry with it a certain level of prestige and reassurance for anyone dealing with it. Clearly where a similar name is used, it would be easy otherwise for a person dealing with the new company, to mistake it for the old company when taking decisions like the appropriate line of credit, or similar.
What are the consequences of breach?
A director found to have breached this restriction is liable to imprisonment or a fine, or both. Additionally, pursuant to s.217 of the Insolvency Act 1986 any person acting in breach of the restriction can be held personally liable for the debts of the company (or business) which they are operating under the similar name.
As with the above, the wording of the provision is broad and mirrors that of a disqualification, to tie in any ‘shadow directors,’ or any person who acts on the instructions of someone who acts in breach of the statutory restriction.
This makes sense given that the restriction operates in a similar way to a disqualification, which is effectively a declaration that an individual ought not to be protected by limited liability, since arguably there is a similar need to protect the public from a situation where they could be being misled by a director acting in contravention of the restriction.
Are there any exceptions?
Yes, there are three exceptions to the restriction:
Exception 1: Where a prohibited name has been used by a company for the period of 12 months ending with the day before the liquidating company went into liquidation, provided that that company has not been dormant at any time in that 12-month period.
This exemption is on the basis that the company is entitled to rely on its own trading history and serves to avoid difficulties within group structures where one entity fails but the others remain solvent. Such a scenario would clearly be impossible without this exception being in place.
Exception 2: Where the court grants permission for the name to be used.
In this scenario, there is a strict time limit in that an application must be made within seven business days of the date of liquidation.
Where an application is made, directors have a grace period of up to six weeks from the date of the liquidation, or the date the court decides whether to grant permission (whichever is shorter).
If a court determination has not been made within six weeks the ban applies in any event. An application can be made at any time during the five-year restriction period, however, the name cannot be used until permission is granted.
Exception 3: Where the whole, or substantially the whole, of the insolvent company is sold by, or otherwise acquired from, a liquidator and before using the name the required legal notice is given that the individual intends to be a director or be concerned in the promotion, formation or management of another company or business that uses the prohibited name.
This is a complicated scenario which often arises when there is a successor business acquiring the assets of an insolvent company. Before using the name, a required legal notice must be published in the London Gazette containing the details of the insolvent company and other statutory information, no later than 28 days after completion of the arrangement. Directors must also send a copy of the legal notice to all creditors of the liquidated company no later than 28 days after completion of the arrangement.
It is important to note that the above process cannot be used if the prohibited name is already being used. Further, it is the responsibility of the director(s) personally to make sure the process is followed. As much as they might like it to, it does not fall to the appointed liquidator. If a director is considering relying on this provision they would be well-served by taking legal advice. Many solicitors will be happy to assist for a reasonable cost (but beware it is treated by some as a ‘loss leader’).
Directors ought not to be concerned that an insolvent liquidation precludes them from acting in respect of another company, but should be wise to the restrictions outlined above. The definition of a ‘similar’ name is a matter of fact which will depend on circumstances. If a director has any concerns about their own position, or intention, having read this article, they should seek legal advice as a matter of urgency.