Section 216 of the Insolvency Act 1986 makes it a criminal offence to re-use a company name where that company has gone into insolvent liquidation. The underlying policy is to protect the public from mistakenly believing they are dealing with the initial company (unaware of its insolvency), when, in reality, they are dealing with a new and separate entity.
Whilst the offence is the re-use of a company name, the offence is committed by the directors of the new company. A director will be at risk of being liable of, to use its colloquial name, “phoenix trading” if:
- They were a director (or shadow director) of Company A within the 12 months before the liquidation of this company; and
- They then become involved in the carrying on of a business using a ‘prohibited name’ within 5 years of liquidation of Company A.
A ‘prohibited name’ is a name which the insolvent company was known by at any time in the 12 month period, or is a name so similar to suggest an association with the insolvent company.
Why would a director need this service?
It can be tempting for a director of a company in Liquidation to set up a new business with the same, or similar, name to that of the liquidated company. It is, however, a criminal offence to do so without having followed the statutory notice procedures or obtaining the court’s permission.
The consequences can be serious and the director involved can become personally liable for the debts of the new company.
What are the potential consequences of using a ‘prohibited name’ without permission?
If a director is found to be liable under this section, they are at risk of:
- A fine or possible imprisonment;
- Confiscation of any benefits obtained from the infringement;
- Disqualification from acting as a director; and/or
- Incurring personal liability for all debts arising during the infringement period.
How can I defend this?
Anyone accused of “phoenix trading” may not necessarily be liable if they can show they have either obtained the court’s permission to do so prior to Liquidation or one of the three statutory exemptions apply, these are:
- When the new company has acquired the whole of the insolvent company’s business, or the majority of it, under an agreement with the Liquidator or Administrator;
- When retrospective permission is sought within the statutory time limits; and
- When the new company has been known by the ‘prohibited name’ for a period of at least 12 months prior to the insolvent company going into insolvency and has also been actively trading during that time.
Another possible defence open to the directors of the new company is that the name is not a ‘prohibited name.’
Is it expensive? What are the likely costs?
We will provide you with an estimate of costs at the outset based on the type of work required.
Our lawyers have extensive experience in advising clients who have concerns about phoenix trading and are able to assist those who wish to continue to use their business’ trading name. We will be able to provide you with bespoke and cost effective advice tailored to your circumstances.