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What is a prohibited name?

Sometimes a company can fall into liquidation due to unforeseen circumstances, more often than not a customer or client can unexpectedly go bust and its failure to pay can lead to cash flow problems for you and ultimately your company going into liquidation.

However if your company was well known and trusted in the market place, you may want to start again and use the good will associated with your company name. The liquidator will no doubt be prepared to sell you the assets of the liquidated company including the name and goodwill but there is a problem.

When a company enters into an insolvent liquidation anyone who was a Director of that company in the 12 months leading up to the liquidation is prohibited from using the name of that company, or one so similar so as to suggest an association with that company for a period of 5 years, unless they have the Court’s permission. This is set out in section 216 Insolvency Act 1986 and applies to both a business carried on through a company or a business carried on “otherwise than by a company”.

This prohibition applies to both the registered name and trading name of the liquidated company. Anyone who breaches section 216 is a committing criminal act. Furthermore section 217 of the Insolvency Act 1986 imposes personal liability on the director acting in breach of section 216 for the relevant debts of the new company. Some individuals may consider sitting in the background pulling the strings whilst someone else is registered as a director. However, this is also caught within section 217 as any person managing a company under the instruction of a person whom they know to be in contravention of Section 216 may be liable for any relevant debts under Section 217.

An application to Court for leave to act in a way prohibited by section 216 can take time and will necessarily incur costs, the Insolvency Rules (England and Wales) 2016 contain three exceptions to the requirement of applying to Court for leave.

The first exception where the whole or substantially the whole of the business was purchased from the insolvent company. This can be a sale by an administrator, administrative receiver, supervisor of a Company Voluntary Arrangement or liquidator and notice of the intention to act contrary to section 216 is given within 28 days of the sale completing. The notice must either be given before the old company enters liquidation or before either the person to whom section 216 applies became a director of the new company, or if already a director before that company begins using the prohibited name. Notice must be given to each individual creditor of the old company as well as being published in the London Gazette.

The second exception is where the director is already a director of another company that has used a prohibited name for at least 12 months prior to the date of liquidation. It is important to note that this exception will only be applicable if the new company has not been dormant at any time during those 12 months.

Finally if neither of the two exceptions above can be used then the third exception to assist in this situation applies where a director or intended director intends to apply for the permission of the court to use a prohibited name. If an application is made within 7 days of the date of liquidation then there is a 6 week period where they may operate under a prohibited name pending the application being determined by the Court. This ‘exception’ will end after 6 weeks or if the court dismisses the application, whichever comes first. It is therefore essential to have the case heard within the 6-week period.

Cognitive law have recently acted for Directors who wanted to use a prohibited name using the Notice procedure as well as in another instance applying to Court.

Any application to Court will require us to liaise with the Secretary of State and we will do all that we can to ensure that prior to the hearing any concerns are addressed so that the hearing is not contested thereby saving time and expense for the client.

In these matters the Court has discretion to grant permission and as such the result of a court application is by no means a certainty, having experience in dealing with such matters vastly increases the chances of the application succeeding.

Where the Notice procedure is available we ensure that all the relevant Insolvency Rules are complied with so that you do not inadvertently end up breaching sections 216 and 217 and committing a criminal offence.

For more information about our insolvency services please click here.

By Darren Stone