There are various routes which can be taken if your business gets into financial difficulty, one of which is the liquidation of a company, also known as winding up. For an overview of these procedures see: What are the options for your business? For more details on insolvent liquidation, ready our article on creditors voluntary liquidation.
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 purchase the business and run it in a new company.
However, unless it is clear that the directors have set up a new company, creditors might be misled into thinking they are dealing with the old company. For this reason, with some exceptions, it is prohibited for directors to re-use the same or a similar name as a company in liquidation. That way, no one can be confused about who they are dealing with, and who they are extending credit to going forward.
Here we explain what is prohibited, the practical issues to be considered, and what exceptions there are to this rule. Breaching this rule can lead to severe penalties for a director, including a custodial sentence, so should be taken very seriously. If you would like legal advice on your own circumstances, or if 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.
- When is a company director prohibited from using a particular company name?
- Who is prohibited, and why?
- What is considered a prohibited name?
- How long does a name remain prohibited for?
- When is it possible to use a prohibited company name?
- What is the penalty for using a prohibited name?
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 5 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 that is the same, or similar, to the name of the company in liquidation.
How long does a name remain prohibited for?
Five years from the date of liquidation of the original company, unless an exception applies.
When is it possible to use a prohibited company name?
There are three exceptions to the rule:
- Obtaining leave of court to use a prohibited name
- If the new business has already been known by the prohibited name continuously for at least 12 months prior to the liquidation
- Giving notice to creditors in the correct prescribed form.
Obtaining leave of court:
This involves making an application to 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 in 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 for the Department for Business Innovation and Skills 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 going to be no prejudice to creditors in using the old name, and that the business wasn’t purchased at undervalue.
If the application isn’t made within seven days of liquidation, the name can’t be used at all unless leave is granted. Therefore if you are a director planning on moving the business into a new company with the same 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 expert team to discuss your options as soon as you decide you wish to use the name, and we can discuss your options.
The name has already been used by the new company for at least 12 months:
If you already have a company set up that has been using the same or very similar name for at least 12 months before the old company went into liquidation, then you can use this exception.
However, the new company must have been trading with this name during that period, and cannot have remained dormant at all during that time.
Giving notice to creditors using the prescribed form:
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.
What is the penalty for using a prohibited name?
There are civil sanctions, the most ususal is that the director re-using the name unlawfully may be 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.
There are also criminal sanctions for breach. A person 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.