Ever wondered how a company can become insolvent but then seems to reappear shortly after? Find out how a company name can be reused following an insolvent liquidation.
What is Section 216 of the Insolvency Act 1986?
Section 216 of the Insolvency Act 1986 prevents directors or shadow directors of a company that has entered insolvent liquidation from trading under a new entity which uses the same or similar name within a period of 5 years from the date the company entered insolvent liquidation. A name which cannot be used is known as a “prohibited name” and covers both trading styles and registered company names. The purpose of this section is to protect creditors and/or the public from the issues that arose from “phoenix” companies.
Who does Section 216 apply to?
Section 216 applies to the directors/ shadow directors personally but does not prevent an individual who was not involved in the insolvent company from trading under the prohibited name.
If a director/shadow director wishes to operate using a prohibited name within the 5 year period, they must use one of the relevant statutory exemptions.
Part 22 of the Insolvency (England and Wales) Rules 2016 provides statutory exemptions as follows:
1. Court Application: The court can grant permission to be a director of, or in any way, whether directly or indirectly, to be concerned or take part in the promotion, formation and management of a company which is known by a prohibited name. If the court grants permission, the individual can use the prohibited name under the corporate entity which has been given permission. The Court will generally only grant permission going forwards and will not ratify any historic breach.
If this application is made within 7 business days of the company entering insolvent liquidation, this gives the director/shadow director a 6-week grace period from the date of liquidation to use the prohibited name. This grace period ends upon a Court Order being made or the end of the 6 weeks.
2. Notice procedure: This is only available where the whole or substantially the whole of the assets of the insolvent company are purchased through an arrangement with the Liquidator (or administrator). Following this purchase, the directors have 28 days to place a notice in the London Gazette and to give notice to all the insolvent company’s creditors.
If the assets are purchased pre liquidation (without first being in administration) or you have been trading in breach of section 216, this exemption is unavailable.
3. Existing Use: Where a person is a director of another company that has already been known by the prohibited name for at least 12 months prior to the date of liquidation, they are exempt from section 216 in connection to that company. It is important to note that the Company cannot have been dormant at any point during the previous 12 months.
The rules and requirements surrounding section 216 are strict with potentially severe penalties.
Insolvency Support
If you are a director of a company that is considering insolvent liquidation but intend on re-using the company name or trading style than book a free consultation with one of our expert insolvency team. We offer fixed fee packages so that you have certainty on costs as well as receiving the best advice for your situation.
If you have received correspondence from the Insolvency Service regarding a suspected breach, our experienced insolvency solicitors are on hand to provide advice and representation. Request your free initial consultation.
