Published: 02/10/2023 By VariousSection 216 of the Insolvency Act 1986 is a UK law that restricts the use of company names by directors who have been involved in a company that has gone into insolvent liquidation. The purpose of this law is to prevent directors from "phoenixing", which is the practice of setting up a new company with a similar name to a company that has gone into liquidation, in order to avoid paying the debts of the old company.
The law applies to any person who was a director or shadow director of a company at any time in the 12 months ending with the day before it went into liquidation. A shadow director is someone who exercises control over the company without being formally appointed as a director.
The law prohibits a person who is subject to it from:
- Directing, forming, managing or promoting a company with the same or a similar name to the liquidated company.
- Taking part in an unincorporated business with the same or a similar name to the liquidated company.
- Being concerned or taking part in the carrying on of a business carried on (otherwise than by a company) under a prohibited name.
The prohibition lasts for a period of five years from the date of the company's liquidation.
There are a few exceptions to the law which allow a director to re-use a “prohibited name” as follows:
- By obtaining permission of the Court (on an application made not more than 7 days after liquidation).
- Where the entity using the prohibited name was trading and known by that name for a full 12 months prior to the Company entering liquidation (common where there is a group operation with various companies using similar names).
- Where the business (or substantially all of it) is acquired from the insolvent Company and the affected director has given necessary notice of the intention to use a prohibited name (a) to the insolvent Company’s creditors, and (b) in the London Gazette, before any contravention of Section 216 occurs.
Directors who breach Section 216 of the Insolvency Act could face serious consequences, including:
- Personal liability for the debts of the company using the prohibited name.
- A fine, imprisonment, or both.
- Disqualification from acting as a director for up to 15 years.
It is important for directors to be aware of Section 216 of the Insolvency Act and to take steps to avoid breaching it. Directors of a company should seek legal advice if they are considering setting up a new company or taking part in a business with a similar name to a liquidated company that they were previously involved in.
The above restrictions apply at present albeit there are proposals to change the rules in the future so watch his space! In the meantime directors must be careful.
Disclaimer: The information provided above does not, and is not intended to, constitute legal advice and is for general information only