Many directors of insolvent companies will start a new business venture, and a natural decision could be to start a company in the same line of work. But it’s important that the directors adhere to the insolvency legislation surrounding the use of similar sounding names in the 5 year period after the company goes into insolvent liquidation. Failure to do so could land the director in hot water and they could be personally liable for all ‘relevant debts’ associated with the company. 

What is a ‘prohibited name’?

A similar sounding company name is referred to as a ‘prohibited name’ and is defined under section 216 of the Insolvency Act 1986 as being either:

• A name by which the liquidating company was known at any time in the 12 months before it entered liquidation; or
• It is a name which is so similar to the liquidating company’s name as to suggest an association with that company.

What the legislation says about using a ‘prohibited name’

There are “excepted cases” where the use of a ‘prohibited name’ is legally acceptable. These excepted cases are as follows:

• The company wanting to use the ‘prohibited name’ is proposing to carry on the whole or substantially the whole of the liquidating company’s business and purchases it from the company’s liquidator and the individual concerned gives prior notice to the company’s creditors and also publishes a notice in the London Gazette.
• An application is made to court for permission to be involved in the company using the ‘prohibited name’. 
• The company wanting to use the ‘prohibited name’ has already been known by that name for 12 months before the company entered liquidation and hasn’t been dormant at any point during that time.

What this means for company directors wanting to use a ‘prohibited name’

The legislation doesn’t only affect those who were previously a director of the liquidating company. If you’re a director of the new company wanting to use a ‘prohibited name’ then the rules also apply to you, if you act or are willing to act on instructions given by a person whom you know at that time to be in contravention of section 216. 

If you can rely on one of the exceptions then your use of a ‘prohibited name’ is acceptable. If you can’t rely on one of the exceptions then you’re potentially breaching the restrictions and you could be held personally liable for all ‘relevant debts’ of the new company under section 217 of the Insolvency Act 1986.  What’s more, that individual will be held jointly and severally liable with the company who is primarily responsible for those debts and any other individual who has breached the restrictions set out under section 216.

If in any doubt, always check with an insolvency professional like ourselves!

Recent cases we’ve worked on

Case 1 – Becoming a director was a costly exercise

Following this company ceasing to trade, a new company was set up prior to liquidation to take on the existing business. The previous director was clear that he was not going to be acting as a director in the new company, nor was he going to be “acting in the management or formation”, he was simply going to be an employee. 

In theory there was no issue with using the ‘prohibited name’. Therefore he did not make use of any of the exceptions. As time passed and his role and position with the new company changed, he realised he did need to be a director. He was then required to submit a time consuming and expensive court application to obtain permission to act as director.

Case 2 – Found in breach by the Insolvency Service

The director in this case was planning to purchase the business of the liquidating company, however the valuation obtained for the goodwill/intellectual property etc., was in excess of what he was expecting. This meant the sale did not proceed. 

Instead, the director used a ‘prohibited name’ for the new company and recently received a notice from the Insolvency Service that the company is in breach of legislation.

Considering using a ‘prohibited name’ and worried about the implications?

If you’re concerned that you may be using a ‘prohibited name’ and you could be in breach of legislation, then speak to us as soon as possible. We can give you clarity on where you stand.

If you would like more information about the potential reuse of a company name or trading name, we can advise further on what needs to be considered. Call 0808 196 8676.