Tax & Accounting News
Prohibited Names and Phoenix Trading
02/12/2008
When a company has been placed into liquidation, Section 216 of the Insolvency Act 1986 restricts the use of its name or trading name. A name that cannot be used is known as a “prohibited name”.
This measure is designed to prevent “phoenix trading”, where directors of a failed company start a new one with the same name, to capitalise on the goodwill of the old business while escaping liability for its debts.
A prohibited name is defined as any name by which the company in liquidation was known or traded under during the12 months immediately before it went into liquidation, or names similar to such names.
Directors or shadow directors of the company in the 12 months before it went into liquidation are also personally restricted.
They are barred from becoming the director or being involved in promoting, forming or managing a business (a sole tradership, partnership or company) using a prohibited name for five years from the liquidation date.
A breach of these Section 216 restrictions is a criminal offence, which carries penalties of a possible fine or even imprisonment.
Under section 217 of the Insolvency Act 1986, a director of a company using a prohibited name could be made personally liable for any debts it incurs, whether or not they are prosecuted under section 216. The same applies to anyone who acts on the instructions of someone who breaches section 216.
However, there are three exceptions to these rules:
- when an insolvency practitioner sells the whole, or a substantial part, of the business and the purchaser gives notice, in a specified way, to the liquidated company’s creditors
- when the courts allow the director to reuse the name. An application must generally be made within seven days of the liquidation
- if the person wishing to use the name is the director of another company that has continuously used a prohibited name in the 12 months before liquidation.
For more information on any aspect of insolvency, please contact us.
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