What’s In a Name? Understanding Phoenixism and the Insolvency Act

One of the many responsibilities of a limited company director is to ensure their company is run in accordance with the Insolvency Act 1986 at all times; this requirement becomes all the more important when financial difficulties lead to the company facing liquidation.

Whilst being the director of a liquidated company does not ordinarily prevent that individual from starting up a new business in the future, when it comes to choosing the trading name of the new company, the Insolvency Act’s stance on phoenix companies must be dutifully complied with. Opting for the same
name, or a name so similar it suggests an association with the liquidated business is a serious matter that could land the director in hot water. The rules surrounding phoenixism have recently been thrust into the spotlight, thanks to a High Court case involving an aborted attempt to sail round the world and a yacht seller found guilty of breaching the Insolvency Act. Defects in a yacht purchased from Discovery Yacht Sales led to the Court of Appeal finding the director of the company guilty of breaching the Insolvency Act 1986 by continuing to use the brand name of a previously liquidated company.

Background to the case

After purchasing a sailing yacht for £1.5 million in January 2017, the plans of an adventurous couple were scuppered when a series of defects with the vessel were discovered. The owners of the yacht successfully sued seller Discovery Yachts Sales Ltd (DYS) as well as another company, Discovery Yachts Group, which was responsible for carrying out repairs on the boat after taking over DYS following its liquidation in 2019.

After a trial in the High Court, the couple were awarded £1.1 million in compensation. This was later taken to the Court of Appeal, where not only was the judgment upheld, but the judge made Discovery Yachts Group’s director personally liable for this seven-figure sum. The director was said to have unwittingly breached the Insolvency Act in his use of the Discovery Yachts brand following the liquidation of Discovery Yachts Sales Ltd.

The importance of professional advice

The case serves as an expensive lesson in why ensuring compliance with the Insolvency Act is of paramount importance for those who operate limited companies as well as their advisers – not least when it comes to the requirements of s216 of the Insolvency Act regarding the reuse of a company’s name following liquidation.
If you have a client considering incorporating a phoenix company, or if they are on the brink of insolvency and assessing their options, your local Begbies Traynor partner is on hand to give you both the specialist advice and guidance you need during this time. We can talk you and your client through their options, while ensuring any steps taken comply with the Insolvency Act.

Begbies Traynor will continue to support accountants whose clients are concerned about their businesses’ viability. We offer a free initial consultation with one of our licensed corporate insolvency specialists at a time convenient to you and offer total confidentiality. In many cases we can provide this service on the same day we are contacted.

Please get in touch for more information.