Published: 28th February 2020
If your company has been liquidated and you are in the process of setting up a new business, you may be tempted to use the same, or a similar name, for your new venture. This may be particularly true if the new company is going to offer the same services and operate within the same sector as the liquidated business. However, there are strict rules governing this process which you must be aware of before establishing the new company. The restrictions are laid out in section 216 of the Insolvency Act 1986 – let’s take a closer look at what exactly this piece of legislation says.
Following the insolvent liquidation of a company, anyone who has acted as director or shadow director in the 12 months prior to the liquidation is forbidden from forming, promoting, or managing a company with the same or a name similar to that of the insolvent company. Once the company has been liquidated, the name becomes ‘prohibited’. A prohibited name includes not only the name of the company at the point of its liquidation, but also any name by which it has been known in the preceding 12 months. It also includes any name which is deemed similar enough to cause confusion or suggest a link to the liquidated company. These rules apply to company directors, owners, or officers of the company, who open a new business, whether or not it is incorporated, for a period of five years following liquidation.
These rules aim to prevent a director running up debt, liquidating the company and consequently leaving creditors out of pocket, only to then set up a brand-new company with a clean financial slate, and operate under a similar trading name, appearing to all intents and purposes as though nothing has changed. This act is known as ‘phoenixism’ and is strictly prohibited by law. Failure to comply with these rules is a serious matter and the consequences are severe. Being found guilty of phoenixism could lead to a substantial fine, becoming liable for the new company’s debts, or even imprisonment in the most serious of cases. These rules not only serve to prevent directors from evading responsibility for their company’s debts but also to protect the interests of outstanding creditors.
Despite the strict rules that apply to reusing a company name following its insolvent liquidation, there are three exceptions where this does not apply:
Mistakes can be costly, not only financially but also on a personal level. Pleading ignorance of the rules is not an adequate defence; therefore, in order to protect your business, and yourself, you need to take expert advice from a licensed insolvency practitioner. It is always advisable to think carefully about forming a new company and if you are proposing to use a prohibited name, which exception you will be relying upon. This ensures you can formulate a plan for the new company which is in full compliance with section 216.
Begbies Traynor has years of experience helping company directors and accountants alike navigate the complexities of business insolvency. We can help with the liquidation of your current company, and provide the help and advice you need to ensure your new venture is fully compliant when it comes to registering its company and/or trading name. To arrange a free no-obligation consultation with one of our licensed insolvency practitioners, call us today on 0800 063 9221.