Directors, shadow directors or anyone involved in the formation or management of a company that has, or will be, going into insolvent liquidation, must consider Section 216 of the Insolvency Act 1986 (IA 1986) if they are looking to trade under a new entity using the same or similar name of a company that went into insolvent liquidation.

To ensure you understand the rules regarding reusing a company name as per Section 216 IA 1986, we have outlined the key components of this legislation in this article. Please note, when referring to ‘directors’ below, we also include shadow directors and anyone involved in the formation or management of a company. 

What does Section 216 IA 1986 say about reusing a company name?

In Section 216 IA 1986, the same or similar name is known as a prohibited name. This covers branding, trading styles and logos, as well as registered company names. As per Section 216 IA 1986, the prohibited name cannot be reused within a period of five years from the date the original company went into insolvent liquidation.

The aim of this legislation is to prevent what has been historically referred to as “phoenixing”, whereby a company becomes insolvent and “rises from the ashes” under a new entity as if nothing had happened, pulling the wool over the eyes of the public and of creditors. Section 216 IA 1986 prevents directors from doing this and aims to protect creditors and the public. 

It is important to note that these rules regarding reusing a company name do not apply to an individual who was not involved in the insolvent company.

What are the penalties for breaching Section 216 IA 1986 and reusing a company name?

A breach of Section 216 IA 1986 may lead to both civil and criminal liabilities. Directors can face fines or imprisonment. Moreover, under Section 217 IA 1986, company directors may also be held personally liable for any debts incurred by the new company if that company then subsequently goes into insolvent liquidation

Directors may avoid civil and criminal liabilities if the circumstances allow them to rely on one of the three statutory exemptions that are provided for in Rule 22 of the Insolvency (England and Wales) Rules 2016 (the “Rules”):

1. Rule 22.4  – Business of a Liquidated Company is Acquired (Notice Procedure) 

For this exemption to apply, the following criteria must be met:

• The new company must acquire whole or substantially whole of the business from the liquidated company; and
• No later than 28 days after the completion date of acquisition, a legal notice is published in the London Gazette; and
• No later than 28 days after the completion date of acquisition, a copy of the notice is sent to all and every creditor.

However, the notice must be given and published before acting in breach of Section 216 IA 1986.

2. Rule 22.6  – Court Application

Directors can apply to the Court for permission to use the prohibited name. The Court can refuse. Under the exemption, there are some strict rules:

• The application must be made within 7 business days of the company going into insolvent liquidation.
• As long as the time requirement is met, there will be a six-week grace period from the date of insolvent liquidation to use the prohibited name, which can allow for the application to be processed and a hearing to be held. The grace period will end after 6 weeks or when a Court Order is made. This does mean that if the hearing is not for 12 weeks following the date of insolvent liquidation, if a director uses a prohibited name after the six-week grace period, they will risk being held liable for the debts of the new company until the order is granted, if it later on goes into insolvent liquidation.

3. Rule 22.7 – The prohibited name is already in use

For this exemption to apply, the new company must:

• Have used or been known by the same or a similar name continuously for twelve months prior to the date of insolvent liquidation; and
• Traded for the whole of the twelve months prior to the date of insolvent liquidation.

The Rules and requirements under Section 216 IA 1986 carry potentially severe penalties for directors involved. This is why it is very important for directors to understand the risks involved in reusing a company name.

It is imperative that directors seek legal advice if they are considering a situation where there is potential to use a prohibited name. There are additional requirements under each exception that need to be considered, and our expert corporate insolvency solicitors here at Kitson Boyce can help you with these and provide you with advice to mitigate your risks.

If you are looking to use a prohibited name or have any concerns regarding the issues under Section 216 IA 1986, please contact us using the form below or via any of our Devon office locations. As insolvency law experts, we are here to help you navigate your next steps.