The rules governing the re-use of company names following an insolvency are not straight-forward and are sometimes overlooked. You will only be able to re-use a company name if you fall outside the relevant restrictions (summarised below), or if you can take advantage of one of the exceptions or obtain court permission. Professional guidance should be sought as to how the rules apply in any particular situation and on the steps which need to be taken to ensure compliance with the rules.
As the country moves out of the pandemic the number of corporate insolvencies is on the rise. The increase in insolvencies has been caused by the withdrawal of government support for businesses in financial difficulty, coupled with the ending of the previous restrictions on creditors issuing winding up petitions against indebted companies.
A summary of the restrictions
The law allows directors of an insolvent company to set up a new company to carry on a similar business, as long as they are not bankrupt or subject to a directors’ disqualification order.
However, the law does impose restrictions on the re-use of company names.
If you’re a director of a company at any time in the 12 months before it goes into insolvent liquidation, you are banned for five years from being a director or involved in the management of a company with the same or similar name to the liquidated company. This same or similar name is known as a ‘prohibited name’.
Prohibited names include the liquidated company’s trading name/names as well as its registered name.
Examples of prohibited names
According to the Government, if the company in liquidation was called ABC Limited and it traded as XYZ, it would be an offence for a former director of that company to be a director or take part in the management of the following (unless an exception applies or the court grants permission):
- a company having the registered name ABC Limited or XYZ Limited
- a company having any other name if it trades using the name ABC or XYZ
- a company with a name so similar as to suggest an association with ABC or XYZ.
If a company was known by a director’s personal name, for example John Smith Builders Limited, then John Smith would still be a prohibited name (unless an exception applies or the court gives permission).
The main exception to the restrictions – the purchase of the business from the insolvent company
A person may use a prohibited name if the whole or substantially the whole of the business of the insolvent company is acquired from a liquidator (including the name and goodwill of the insolvent company), and if (before using the name) notices in the required form are sent to the creditors of the insolvent company and in addition a notice is published in the London Gazette.
The purpose of the rules
In many cases there will be significant goodwill in a company’s registered name and/or its trading name. In many cases a trading name is the most valuable asset of the insolvent company. The rules in this area are there to ensure that a successor business properly acquires the name and goodwill from the liquidator of the insolvent company (who will be seeking the best possible price for those assets, on behalf of the creditors of the insolvent company), and to minimise the chances of creditors or suppliers being confused by the re-use of the company name.
Sanctions for breach of the rules
Breach of the rules is a criminal offence, for which directors can be imprisoned or fined. Although a custodial sentence is unlikely and would only be appropriate in the most serious of cases, a conviction will nevertheless bring a director within the ambit of the Proceeds of Crime Act, and therefore liable to a confiscation order being made against him. In some cases orders have been made against directors under the Proceeds of Crime Act to repay all of the income the new company has received whilst it has traded with a prohibited name.
A further consequence of breach of the rules (which isn’t dependent upon a criminal conviction) is that a director will be personally liable for the debts of his new company.
So the penalties for breaching the rules in this area are severe (and arguably disproportionate).
What can go wrong?
The rules in this area are sometimes overlooked or misunderstood. Directors sometimes use a prohibited name in complete ignorance of the rules, or because they fail to understand or comply with the technical requirements of the rules.
How can Birketts help?
Birketts’ restructuring and insolvency lawyers can assist with the purchase of assets and businesses from insolvent companies and with ensuring compliance with the rules in this area.
If something has gone wrong, we have recent experience of obtaining court orders granting directors permission to use prohibited names. The court is generally sympathetic to applications of this nature, if non-compliance with the rules has been inadvertent and if the liquidator of the insolvent company is supportive. However a court order will not have retrospective effect.
Please contact Matthew Weston if you wish to discuss issues raised in this article in more detail.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at February 2022.