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  • The re-use of company names following insolvent liquidation

    admin July 18th, 2011 Advice
    recycle

    A lot has been written about companies that close their doors one day, dump their debt and start up trading under a new vehicle the next day. So much so that legislation was introduced to kerb the abuse of this, which effectively introduced greater penalties on errant Directors, and allowed Creditors and Courts more control in the process of allowing company names to be re-used.

    Many companies, especially in the current economic climate, will struggle and ultimately some will fail, but it does not mean the directors of that company should not be allowed to try again – after all, everyone has a right to earn a living. There are often legitimate reasons for wanting to re-use a company name, and it is therefore necessary to distinguish between genuine entrepreneurs and those who deliberately seeking to avoid paying creditors.

    One of the main obstacles to consider when weighing up whether to re-use a company name relates to the legislation surrounding the restrictions on the re-use.

    Re-use of company names: The Law……….

    The law is set out under Section 216 of the Insolvency Act 1986 and specifically relates to a person who was a director or shadow director of a company that went into insolvent liquidation, in the twelve month period preceding that liquidation.  Such name is defined under Section 216 of the Insolvency Act 1986 as:

    a. a name by which the liquidating company was known at any time in the period of 12 months preceding the date of liquidation, or
    b. a name which is so similar to a name falling within paragraph (a) as to suggest an association with that company.

    Except with leave of the Court or specific circumstances, a person to whom this applies shall not at any time in the period of 5 years beginning with the day on which the liquidating company went into liquidation:

    a. be a director of any other company that is known by a prohibited name, or
    b. in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any such company, or
    c. in any way, whether directly or indirectly, be concerned or take part in the carrying on of a business carried on (otherwise than by a company) under a prohibited name.

    Getting it wrong: The Punishment……..

    A person who acts in contravention of this legislation is liable to imprisonment or a fine, or both.  However, the legislation goes further, stating that if the new company latterly enters into insolvent liquidation, the relevant director(s) could become personally liable for all the debts of that company whilst he was involved.

    So the first thing to consider is whether or not the company name has a value in terms of ongoing trade.  Is there any goodwill associated with that name, especially given the fact the original company is now in insolvent liquidation?  If it is deemed that using that name or a similar name would be beneficial, then due to the complex nature of the law surrounding this issue, you should immediately seek advice from an insolvency professional to establish the correct manner in which to proceed. Due to the punishments for failure to comply, this is not an area that should be overlooked. Claiming ignorance of the legislation is simply not a defence – so seek advice.