After insolvency

Can the management of an insolvent company simply start up again under a new but only slightly different name? Lawyer Samantha Gregory explains

The problem

I was the director of a company which was recently put into insolvent liquidation. I have been approached by another of the directors who has suggested that we set up a new company with the same name. Is this allowed?

The law

The value attached to a company's name may be significant if it is well established in a particular market. Its name is part of its brand.

It is an offence under the Insolvency Act 1986 ("the act") if a person who acted as a director or shadow director of a company which has gone into insolvent liquidation ("insolvent company") acts as a director - or in any way takes part in the promotion, formation or management - of a successor company with the same or similar name ("successor company") for a period of five years.

The offence was introduced to combat what is known as the Phoenix Syndrome, where the privilege of limited liability is exploited to deceive creditors or to cash in on the goodwill of a defunct company.

The act also covers trading names, so that it is an offence to take part in carrying on a business under a prohibited name.

Breach of the act can result in a fine, imprisonment or both. The director may also be held personally liable for the debts of the successor company.

A "prohibited name" is a name which is so similar to the name of the insolvent company as to suggest an association. The informal use of acronyms has been held to be sufficient to show a link to an insolvent company.

Expert advice

With careful planning, a director can avoid the consequences of breaching the act. A person who is considering becoming involved in the management of a successor company with a prohibited name should seek independent advice from a solicitor at the earliest opportunity.

The act provides hope by setting out three exceptions, which are subject to specific time periods. Briefly, these are:

Notice The successor company acquires the whole of the business of the insolvent company and notice is provided to all the creditors of the company within strict time limits.

Apply to court An application to the court can be made for permission to act as a director of the successor company. This application must be made within six weeks of the company entering into liquidation.

Existing company The act will not apply if the director has been involved with a company known by a prohibited name for at least 12 months prior to the date that the insolvent company went into liquidation.

Check list

• If there is a possibility that you could be in breach of the act, independent legal advice should be sought before you become involved in any way in the successor company.

• You and your advisers will need to establish whether there is a "prohibited name" issue.

• Your adviser can then establish whether any of the exceptions set out in the act are appropriate to you and ensure that steps are taken within the time limits.

• The act is of particular importance with regard to groups of companies. A director of a group of companies all bearing similar names would risk breaching the act if one of the group is placed into insolvent liquidation.

• Notice must always be given before a director acts in any way which would be prohibited by the act.

Beware!

Consequences of breaching the act are strict and can include a fine, imprisonment or both. A director may also be held personally liable for the debts of the successor company.

Contacts

• Samantha Gregory, Davenport Lyons Solicitors 020 7468 2600, sgregory@davenportlyons.com

• The Insolvency Service, www.insolvency.gov.uk

• Companies House, www.companieshouse.co.uk