It is an unfortunate fact of life that a large number of companies end up in insolvent liquidation. Often that is just a circumstance of business life (many of our most successful entrepreneurs have previously been involved in business which have failed). Sadly, on other occasions it is because of dishonesty or a cavalier attitude adopted by the owners of those companies.
The Insolvency Act 1986 (“the Act”) included a provision (Section 216) which was designed to protect the public from being misled when they deal with a new business whilst thinking that they are still dealing with the old liquidated company. This was particularly aimed at people who sought to trade through successive companies using similar names but leaving behind creditors owed substantial sums of money each time the previous company became insolvent.
Although that was the intention of the Section, it does apply more widely and makes it a criminal offence for anyone who was a director (or shadow director) of a company in the 12 months leading up to the company becoming insolvent to use a “prohibited name”.
A “prohibited name” is either the name by which the liquidated company was known in the 12 months prior to its liquidation or a name which is so similar as to suggest an association with that company.
Whether or not a name is “so similar” is a matter of fact to be determined by the Court if necessary but guidance has been given in a number of cases and the Courts have held that if there is a similarity between the names which may give rise to a probability that members of the public could associate the two companies with each other, whether as successor companies or as part of the same group, that will be sufficient to commit the offence.
The Courts have also made it clear that it is not necessary that customers of the company should be led to believe that they are dealing with a liquidated company. All that is required is that it is seen that there is some kind of association.
There are a limited number of ways to avoid committing an offence under this Section.
The first of these is to apply to the Court for approval to use the name.
The next is the name may be used if the successor company acquires the business or substantially the whole of it from the liquidator but, in those circumstances, notice must be given to creditors within 28 days of completion.
There are also provisions to the Court to sanction the use after the liquidation has occurred and the time limits for this are very strict (the application must be made within 7 days and permission granted within 6 weeks).
The final exception is where the company which is not in liquidation has been known by the name it is using for the whole of a period of 12 months before the other company went into liquidation and that it was not dormant during that period.
In the absence of any of the above, to use the name will amount to a criminal offence and a director of a company in these circumstances is liable for up to 2 years’ imprisonment or a fine or both.
In addition to the criminal sanction, there are some serious civil ramifications which are:-
- The offender will be personally liable for any debts incurred in the running of the new business.
- It is possible for the prosecution to apply to confiscate any benefit that the offender gained by committing the offence under the provisions of the Proceeds of Crime Act 2002.
- The Court may order the person to be disqualified from acting as a company director for a period of up to 15 years.
It seems surprising that, although this has been the position in English law for several decades, many owners of companies seem to be unaware of the fact or simply ignore the risks which they are taking.