Once a company enters liquidation, it is typical that its directors will become involved in another company within the same sector.
Often, this can be in continuation to the business of the company in liquidation and may involve adopting the same or similar name and trading style. In doing so, the directors may be in breach of section 216 of the Insolvency Act 1986, and risk both criminal and civil proceedings.
Olly Moore, a solicitor in our corporate team who specialises in insolvency, advises on the key points directors should be aware of and the potential consequences they could face.
What is section 216 of the Insolvency Act 1986?
Section 216 of the Insolvency Act 1986 restricts any individual who has served as a director or shadow director of a company in liquidation in the 12 months prior to the company entering liquidation from being:
- concerned or otherwise taking part, whether directly or indirectly, in the promotion, formation or management of a company (or business) being known by a “prohibited name”
- a director of any company known by a “prohibited name”
The restriction will last for a period of five years.
What is a prohibited name?
A name will be prohibited if it is the same as the name or trading style used by the company in liquidation, prior to it entering liquidation, or if the name used is so similar that it would suggest that the company (or business) is associated with the company in liquidation.
In considering whether the similarity of the trading name and trading style, the following factors will be considered:
- the location of each business.
- the products and services offered by each business.
- the customers of each business.
- the individuals involved in the operation of each business.
What are the consequences of breaching section 216 of the Insolvency Act 1986?
A breach of section 216 of the Insolvency Act 1986 Act is a criminal offence, and risks:
- imprisonment and/or a fine.
- confiscation of any benefit obtained whilst in breach of section 216 of the Insolvency Act 1986.
- disqualifying the relevant company director from acting as a director of any company, for up to 15 years, dependent upon the extent of the breach.
In addition, any individual who has breached section 216 of the Insolvency Act 1986 becomes personally liable for the debts of the successor company for the period in which the breach persisted.
In practice, what does this look like?
An individual served as a director of a company which traded as “The Red Lion” pub and is a director of the company when it enters liquidation. “The Red Lion” pub closes down as a result of the liquidation.
Two months later the director sets up the new company, which operates from the same premises and trades as “The Red Lion” pub.
As “The Red Lion” was the trading name of the company prior to it entering liquidation, and the director’s new company has adopted the exact same name, it would be deemed a prohibited name. This is further supported by the new company trading as the same type of business, a pub, and trading from the same premises.
As the director was a director of the company in liquidation in the 12 months prior to the company entering liquidation, and has become a director of a company trading under a prohibited name within 5 years of the company entering liquidation, the director is in breach of section 216 of the Insolvency Act 1986.
The director risks a fine and/or a custodial sentence and or disqualification as a director for this breach. The director will also be personally liable for all debts in the new company whilst the breach persists.
Relief and exceptions
If a director has breached section 216 of the Insolvency Act 1986, they would need to make an application to court to seek an order granting them leave to act in another company with a “prohibited name”, unless one of the exceptions to section 216 of the Insolvency Act 1986 applies. The exceptions being:
- the new company had already been known by the “prohibited name” for a period of at least 12 months before the original company entered liquidation. This exception excludes dormant companies.
- the interim protection provided if the necessary application to court is made within seven business days of the company entering liquidation.
- notice being provided to the creditors of the company in liquidation.
Conclusion
If you believe you may have breached section 216 of the Insolvency Act 1986, it is important to take advice on the potential risks to you and how to address this breach, without delay. The exceptions to section 216 of the Insolvency Act 1986 are time sensitive and therefore any delay in taking action can result in certain exceptions not being available to you.
The insolvency and restructuring team at Mincoffs Solicitors have extensive experience in advising on all matters relating to section 216 of the Insolvency Act 1986 and can assist in providing valid notice to creditors or otherwise making an application to court for leave to act as a director.
For expert advice on all aspects of insolvency, contact Olly Moore on omoore@mincoffs.co.uk, or call the office on 0191 281 6151.
