Purchase of a prohibited name and the subsequent completion of the arrangement.
Often, after a company has gone bust, it would appear to the outside word that the director of that company simply starts up again and trades using the same or similar name as the defunct company.
The director does this by incorporating a phoenix company before or after the insolvency proceedings. By doing this the new business may retain the insolvent company’s customers and take advantage of the brand value created by the insolvent company. The liabilities however are usually, to a large extent, left behind.
To alert creditors with such malpractices, Section 216 of the Insolvency Act imposes certain restrictions on the directors and/or shadow directors on the re-use of a prohibited name. Use of a prohibited name by a director without proper authority is an offence and could be liable for imprisonment and or fine. The director could be personally liable for the debt of the new company for the duration of their involvement under Section 217 of the Insolvency Act 1986.
What falls under a prohibited name and the exemptions available to a director of the insolvent company to re-use a prohibited name were detailed in our article dated 25 March 2015. Following the new insolvency Rules in 2016, similar exemptions are still available in Rules 22.4 to 22.7of the Insolvency (England and Wales) Rules 2016.
A widely used option to continue use of a prohibited name (under Rule 22.4) is the purchase of the whole or substantially the whole of the business of the insolvency company, including the brand and the trading style, under an arrangement with the liquidator, administrator, administrative receiver or supervisor of a CVA. However, directors can unwittingly fall foul of the rules they are required to follow.
For the exception to apply, Notice must be given by the director(s) of the insolvent company prior to him acting as a director in the new company to:
- Every creditor of the insolvent company known, or reasonably ascertainable, to that person; and
- publish the notice in the London Gazette.
The Notice may be given and published before completion of the arrangements, but must be published no later than 28 days after completion. The meaning of completion of the arrangement has not been defined in the new rule and there is a lack of clarity in term of the completion date. For some it is the date when the purchase agreement was executed and for others it is the date when the payment was made in full under the purchase agreement. The Insolvency Service considers that the arrangement is completed at the point at which the agreement is made between the insolvency practitioner and the purchaser to acquire the business. From 6 April 2017, Notice must be given using a new form under R 22.4 which replaces the old statutory Form 4.73. This is available to download from the gov.uk website. You are unable to use this form if you are already in breach of S.216.
The director of New Co entered into an agreement on 13 July 2017 with the liquidator of Old Co to purchase the business/goodwill including the trading name/style for £60,000 payable monthly £5,000 for 12 months. In this example, the date of the completion of the arrangement is on 13 July 2017, being the date the agreement was executed, which triggers the countdown of the 28 day maximum notice and advertising period. Settling the payment in full later, in this case in July 2018, has no effect in term of the completion of the arrangement. The Insolvency Service also clarifies that Notice under Rule 22.4 has to be given to the creditors before that person becomes involved in the management of the successor company/ business under what would otherwise be a prohibited name.
Who will investigate the breach of S-216
The Insolvency Service’s Breach Team deal with breaches of Section 216 of the Insolvency Act 1986. They will liaise with the purchaser to rectify the breach, but where a breach continues, or there are other public interest factors, the breach team may refer the matter to their Criminal Enforcement Team for further assessment and possible prosecution.
To rectify the breach the director either has to change the company/ business name or make an application to the court for permission. Both options may incur significant cost and cannot be applied retrospectively.
Failure to seek insolvency advice at an early stage would place you at risk and or an adverse situation/position.
If your company is insolvent and you as a director who would like to re-use a prohibited name, please call for a free and confidential advice from one of our professional advisers on 01474532862 or email to firstname.lastname@example.org or email@example.com.