When a company goes into insolvent liquidation, sometimes the existing directors of the company will be able to rescue some or all of the business and will buy the assets of the business and run it through a new company with a similar name to the old company. The motivation behind this is sometimes to create a ‘phoenix’ company where the old company leaves behind its debts through the insolvent liquidation process but then continues to trade using the goodwill and brand of the old company by using the same or a similar name which misleads the public and creditors into believing they are still trading with the old company.
Insolvency law currently limits the re-use of a company name following an insolvent liquidation and, subject to certain exceptions, a breach of this restriction will be a criminal offence which can lead to severe penalties for a director, including fines, disqualification, personal liability for company debts and even a custodial sentence.
Here we explain what is prohibited, the practical issues to be considered, and what exceptions there are to this rule. If you would like legal advice on your own circumstances, or if you would like to discuss how an exception to the rule might work for you, we recommend you speak with one of our specialist recovery and insolvency solicitors.
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When is a company director prohibited from using a particular company name?
When a company has gone into insolvent liquidation, it is not possible to use the same or a similar name of that company in liquidation for a period of five years from the date of liquidation.
Who is prohibited, and why?
Any person who was a director, including a person who was acting as either a de facto or a shadow director, at any time in the 12 months immediately prior to the liquidation of the company that goes into an insolvent liquidation. Insolvent liquidation is either a creditors’ voluntary liquidation or a compulsory liquidation. This applies equally to sole traders and partnerships seeking to use the name.
What is considered a prohibited name?
A name is considered to be prohibited if it is:
- the registered name of the liquidated company at any time within a period of 12 months prior to liquidation,
- another name associated with the liquidated company within the 12 months prior to liquidation, for example, a trading name or a brand name; or
- a name which is similar enough that customers or suppliers are likely to think that the businesses are linked.
As an example, if the liquidated company was called William Limited but traded as “Billy” then (unless an exception applied or permission had been granted by the court) an offence would be committed by a director of the previous company to act as a director or take part in the management of a company with:
- the registered name of William Limited or Billy Limited
- a trading or other name using William or Billy
- any other name which is similar enough to suggest a connection with William or Billy.
As there may be several grey areas around whether a name falls within the prohibited name restriction, it is always best to seek legal advice before deciding on a name.
How long does a name remain prohibited?
Five years from the date of liquidation of the original company, unless the court grants permission to use the name or an exception applies.
When is it possible to use a prohibited company name?
Directors will need to seek the court’s permission to re-use the old company name unless one of the three statutory exceptions apply, as set out below.
A company acquires the business of an insolvent company from an insolvency practitioner and notices in a prescribed form are sent to all creditors and published in the Gazette within 28 days of the date of acquisition. This is the most commonly used exception. Where a director of a company that goes into insolvent liquidation buys the whole or substantially the whole of the business from the liquidator (or other office holder, such as an administrator), then they can use the same or a similar name if they give notice of the re-use of the name to creditors in advance.
There are very strict rules about the form of the notice, when it must be given, who must give it, and who must receive it. It must also be advertised in the Gazette during the prescribed period. Failure to follow the rules will lead to a breach, which can have severe penalties.
Leave of the court is obtained to use a prohibited name not later than seven days from the date the company went into liquidation and where leave is granted no later than six weeks from the date the company went into liquidation.
This involves making an application to the court asking for permission to use the name. Timing is key here. If a director makes the application within seven days of the date of liquidation, then they may use the name for the new company for up to six weeks until the matter is heard in court. If it is not heard within that time, they must stop using the name or risk prosecution.
The Secretary of State must be given the application to review, and may make recommendations to the court to either grant or deny leave. It is important for the director to show there is no prejudice to creditors in using the old name, and that the business wasn’t purchased at an undervalue.
If the application isn’t made within seven days of liquidation, the name can’t be used at all unless leave is granted. If you are a director planning on moving the business into a new company with the same or similar name following liquidation of the old company, you should make sure your application is ready to go at the same time as the liquidation if possible, to avoid delay.
If you wish to use this route, contact our insolvency solicitors to discuss your options as soon as you decide to use the name.
Where the new business has already been known by the prohibited name continuously for at least 12 months prior to the liquidation.
If you already have a company set up that has been using the same or similar name for at least 12 months before the old company went into liquidation, then you can use this exception. The new company must have been trading with this name during that period and cannot have remained dormant at all during that time.
What is the penalty for using a prohibited name?
There are civil sanctions, the most usual is that the director re-using the name unlawfully may be disqualified and be held personally liable for all of the debts of the new company while in breach. This is the case whether they knew of the breach or not. For more information of the consequences of director disqualification read our director disqualification guide.
There are also criminal sanctions for breach. A director who breaches this rule commits a criminal offence which may lead to a fine or imprisonment or both. No knowledge or intention to deceive or defraud is needed due to the strict liability nature of this offence.
Summary
Prohibited names can be a tricky area of insolvency law with serious consequences for directors falling foul of the rules. If you are considering trading with the same or a similar name to a company which has gone into insolvent liquidation then please seek legal advice as soon as possible to make sure you are following the correct procedures.
