Restriction on Re-use of Company Names
Section 216, Insolvency Act 1986 applies very widely and has far-reaching consequences for those that fail to properly adhere to the fine detail of the exceptions. Find out more here.
It is illegal for any person who was a director (or shadow, de jure or de facto director) of a company in the twelve months before that company went into Liquidation to be involved with another company with the same, or similar, name or trading style for a period of five years. This blanket ban applies automatically and the penalty for contravention is a fine or imprisonment, or both. The errant director may also be disqualified from acting as a director for up to 15 years as well as being made personally liable for the debts of the successor company.
Being involved with another company includes being part of that company’s management or setting up, or helping to set up, the new company – in a nutshell, being involved in the promotion, formation or management.
The ban does not apply to companies that have entered into a different insolvency process such as Administration or a Company Voluntary Arrangement, unless those processes subsequently result in the Liquidation of the company.
There are however three exceptions.
- Use of name by a pre-existing company
If you are a director of two companies with similar names, let’s say:
John Smith Limited and
John Smith (Heating) Limited
and both companies have been trading uninterrupted under those names for at least twelve months on the day one of them is placed into Liquidation, then the ban on being a director of a company with a similar name does not apply to your directorship of the other company.
- With the permission of the court
A director may apply to court for permission to act, or to continue to act, as a director of a company with a similar name or trading style. The application for permission must be made within seven days of the date of Liquidation. The court will decide whether the company is properly capitalised, whether the management has adequate financial experience and if the reasons for the original Liquidation might re-occur. The court’s permission is certainly not a foregone conclusion.
- The formal notice procedure
Where a company acquires the whole, or substantially the whole, of the business of the company in Liquidation (including its name or trading style) from its Liquidator (or Administrator), the successor company may give notice to the creditors of the company in Liquidation or Administration that it will be trading under a similar name and that a director of the company in Liquidation or Administration intends to become a director of the successor company.
This notice must be sent to the London Gazette for publication and to every creditor of the company in Liquidation or Administration, both within 28 days from the completion of the purchase of the name and assets from the Liquidator or Administrator.
It is important to note that the proposed director of the successor company must not be in office until notice has been published in the London Gazette and sent to all creditors. If this is not observed, the exception does not apply and the director loses the benefit of limited liability in the event that the successor company subsequently becomes insolvent.
Do these provisions apply in the following circumstances?
- I was never a registered director at Companies House, I just ran the company for my friend while he was on holiday. They still apply
- The trading name is very different from the company’s registered name. They still apply
- The name relates to a product the company sold. They still apply
- The company was a franchise operation – all franchise holders have to use the name. They still apply
- I was a non-executive director. They still apply
As you can see, this piece of legislation applies very widely and has far-reaching consequences for those that fail to properly adhere to the fine detail of the exceptions highlighted above.
It’s vital to take professional advice at an early stage to ensure that you stay on the right side of the law and avoid potential personal liability.
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