The re-use of a name of a failed company, the Myth and the Law
When speaking with Clients one question which is asked more frequently than any other is whether the Director of a failed Company can be a Director of another Company and are they able to trade under a similar name as to the failed Company.
According to the Myth, the Directors can no longer act in that capacity and nor can they reuse the trading name.
The answers lies in two separate pieces of legislation and accordingly are discussed separately.
The rules set out in Part 10, Chapter 1 of the Companies Act 2006, clearly state that anyone above the age of 16 who has not been disqualified from being a Director or is an undischarged bankrupt can be a Director of a Company and therefore accordingly can be a Director of any successor business or any other Company.
To validate whether the Director of any successor Company can re use a similar name or trading style of a failed Company, we have to examine section 216 of the Insolvency Act 1986, which states when a Company goes into insolvent liquidation, anyone who was or acted as a Director of the Company in the 12 months before the liquidation must not act as a Director of another Company or business with the same or similar name for 5 years. This is known as a prohibited name. Breaking this rule may be a criminal offence, and that individual may be personally liable for any Company debts incurred while the name is prohibited.
However, there are 3 exceptions to this rule. In brief, these are:
- sale of the business by a licensed insolvency practitioner giving the legally required notice;
- where the individual gets the Court’s permission to use the name;
- where another Company or business has also been using the same name for at least a year (subject to conditions).
At Kingsland Business Recovery we work closely with the client, their advisors and solicitors engaged to ensure the first exception rule is applied and the client’s successor business is legally able to re use the name or a trading style of the failed business.
If the above procedures are not followed correctly the repercussions for the director are set out in s217 of the Insolvency Act 1986, which states a person is personally responsible for all the relevant debts of a Company if at any time is in contravention of s216.
If your client is experiencing financial distress and values the name of the business above other assets we would strongly recommend that you contact us for a free no obligation first meeting.
Case Study: Freight Forwarding Company
We were asked by one of our contacts to assist their client, a Freight Forwarding Company, who had experienced severe cash flow problems. We initially explored all alternative options at the first meeting, including refinancing and a Company Voluntary Arrangement. However, due to the loss of a large contract the only viable option was to place the Company in Creditors Voluntary Liquidation (CVL).
The Director knew the industry and wished to establish a successor Company and enquired whether he was able to re use the Company name. We introduced the Director to a firm of solicitors who specialised in this area, who worked closely with us and were able to provide a relatively cheap solution within a short period of time.