As Vee Bharkhada, Founder & Managing Director of Navigate Business Recovery Ltd, my career, spanning more than 36 years, has given me a deep insight into insolvency related cases. A common scenario I encounter, often misunderstood by directors, involves the rules around reusing a company name after a business has gone into Administration.
Many believe that simply starting a “new” company with a similar name or structure, often referred to as phoenix activity, is a straightforward way to continue trading. However, this area of insolvency law is fraught with serious pitfalls.
The Prohibited Name Rule: Section 216
Section 216 of the Insolvency Act 1986 is specifically designed to prevent the unfair re use of a company name following its Administration or liquidation. This provision aims to protect the public and creditors from being misled into thinking they are dealing with the old, failed entity.
With a wealth of experience accumulated over 36 years in insolvency related cases, I can tell you that this rule is broadly applied. It is a criminal offence to act as a director of a new company that uses a prohibited name, or one so similar it suggests an association with the old company, within five years of the old company going into insolvent liquidation or Administration, without Court approval.
Risks of Indirect or Nominee Activity
The law is deliberately wide ranging to catch attempts to circumvent these rules. Even if you try to act indirectly or through a nominee, such as a spouse or another associate, you can still fall foul of Section 216. This is particularly relevant for directors with established business networks or significant personal assets, as authorities will scrutinise any perceived attempts to evade the rules.
Breaching Section 216 can lead to imprisonment, a fine, personal liability for the new company’s debts, and director disqualification. It’s a very serious matter that often catches directors unaware.
My Guidance on Company Name Re Use
If you are considering continuing a business after its Administration or liquidation, it is vital to understand the legal duty under Section 216:
- Seek Court Approval: The primary way to legally reuse a company name is by obtaining Court approval. This involves a formal application demonstrating that the re use is transparent and not designed to mislead.
- Explore Exceptions: There are limited statutory exceptions to Section 216, but these are narrow and complex. Relying on them without expert advice is highly risky.
- New Name Strategy: If Court approval isn’t feasible or desired, ensure your new company name is distinctly different and does not suggest any association with the old entity.
- Transparency: Be completely transparent with creditors and stakeholders about the cessation of the old company and the commencement of any new venture.
Attempting to bypass Section 216 through indirect means or by using a nominee is a dangerous path. Always secure proper professional advice to navigate these rules correctly and avoid potentially life changing penalties.
Disclaimer: This article provides general information and guidance only and does not constitute legal or professional advice. Each situation is unique, and you should seek specific advice tailored to your circumstances. Navigate Business Recovery Ltd accepts no liability for any loss incurred as a result of acting or refraining from acting on information contained in this article.
Leave a Reply