When a company goes into insolvent liquidation, it is sometimes the case that the directors of that company want to set up a new company.
Often, directors want the new company to have the same name as the old company so that they can benefit from any goodwill generated by the old company.
While there is no general restriction on the directors of insolvent companies starting a new company, there are specific rules which prevent them from reusing the same name.
Section 216 of the Insolvency Act 1986 was enacted to prevent the so-called “phoenix syndrome” where a new company is setup, trading under a similar name as an insolvent company, with the insolvent company’s assets and management, but free of its liabilities and exploiting its goodwill and business opportunities.
The aim of section 216 is, therefore, to protect the public from being misled into dealing with a new business, thinking that it is still a liquidated company.
When a company goes into insolvent liquidation, section 216 restricts its directors and any shadow directors from being involved in another company or business with the same or similar name as the company in liquidation.
Additionally, a person involved in the management of the second company will also be personally liable for certain debts of the new company if he or she acts or is willing to act on instructions given by a person whom he or she knows is in breach of section 216.
Please note, the section 216 restriction does not apply to directors or shadow directors of companies liquidated on a solvent basis e.g. by way of members’ voluntary liquidation.
A name is prohibited if it is either the same name as the liquidated company or if it is so similar as to suggest an association with the company in liquidation.
In determining whether a name is prohibited, the Court will consider the following points:
An offence committed under section 216 may be reported by the Official Receiver, an insolvency practitioner, investigators at the Insolvency Service or Department for Business and Trade, reports from members of the public or creditors or the Court when dealing with a company’s winding up.
Section 216 offences are prosecuted in the criminal courts by the Insolvency Service’s Criminal Enforcement Team (CET).
The CET investigate complaints and decides whether charges should be brought.
The CET usually contacts the directors of the new business or company that it suspects contravenes section 216.
The CET may offer the business time to correct the offence, such as by changing its name, before deciding on whether to prosecute.
However, whether the CET will offer the business time to correct the offence depends on the individual facts and should, therefore, not be relied upon as occurring in every situation.
In order to prove a section 216 offence, the CET would have to show:
There is no statutory defence to section 216.
However, the offence does not apply where:
If the director or person acting in the management or formation of the new business applies to the Court for leave to reuse the liquidated company’s name or a name similar to it, there will be no offence if leave is granted before the business starts.
The application should be made to the Court, which is already dealing with any liquidation issues of the original company.
Notice of the application has to be given to the Insolvency Service or the Official Receiver as they will have to provide their view to the Court as to whether leave should be granted.
Consideration will be given to any likely perceived connection between the original and new businesses.
Any risk that the public could be confused into thinking the original and new businesses are connected may mean an application for leave is refused by the Court.
There are three situations in which no offence under section 216 will be committed.
These exceptions are found in Rules 22.4 to 22.7 of the Insolvency (England and Wales) Rules 2016 and are as follows:
A breach of section 216 may lead to civil and/or criminal liability. Both civil and criminal liability are automatic: if the conditions for liability are met, the Court has no discretion to limit the defendant’s liability.
Infringement of section 216 can lead to:
Please do not hesitate to contact Myerson’s experienced and knowledgeable Insolvency & Restructuring Team if you need assistance or advice on issues relating to section 216 of the Insolvency Act 1986.
Vicky has over 13 years of experience acting as a Dispute Resolution and Insolvency solicitor. Vicky has specialist expertise in contentious insolvency matters, advising insolvency practitioners, directors in relation to both corporate and personal insolvency issues.
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