Directors who re-use a Company name on insolvency, risk falling foul of Section 216, one of the most draconian sections of the Insolvency Act 1986. A breach of this section is a criminal offence and results in the director or a shadow director, and anyone who assists him knowing he is in breach, being liable for the new Company’s debts. Andrew Garland, Partner at The Wilkes Partnership, discusses the issue.
Section 216 states that unless an exception applies a person cannot be a director, promote or be concerned in the management of a company with the same or similar name to a insolvent liquidated Company of which he was a director or shadow director for a period of 5 years prior to the liquidation.
The definition of name is wide. It is not just a Company’s registered name, it is also any trading name. Indeed one case went as far as to include a promotional name. If the court considers that the name is sufficiently similar so as to suggest an association with the old company then the director will be caught. So for instance the names “MPJ Construction Limited’ and “MPC Contractors Limited” were considered sufficiently similar to each other for the director to be made personally liable for the new company’s debts.
Ignorance of the law is no defence! If you breach S216 you are liable.
There are 3 exceptions to liability under S216:-
- If the new company has been trading for at least 12 months prior to the liquidation of the old company. Note it must have been actively trading throughout that period, it is no good if it was dormant for part;
- You can apply to court for permission to use the similar name. However, any application must be issued within 7 business days of the insolvency of the old company. The court will ask for a report from the Insolvency Practitioner so it can be sure the director is not seeking to take the old company’s goodwill and business for free. Even if the Report is positive it is still not guaranteed that the director will get leave as the court will want to be satisfied as to the viability of the new Company.You can apply for permission of the court later but if it has not been applied for within the grace period of 7 business days of insolvency, any permission granted is probably not going to be retrospective so the director will still be liable for the new company’s debts until the date of permission.
- Where the business of the old company is bought from an insolvency practitioner ie a Liquidator, Administrator, Supervisor of a Voluntary Arrangement or Receiver. However this exception only applies if various other requirements are strictly followed (a letter to all creditors and notice in the London Gazette in prescribed form) and this must be done within the prescribed time limit. It is also worth bearing in mind that this exception cannot be used if the director is already in breach of S216, and therefore plans need to be made before the company goes into insolvency if this exception is to be relied upon.
As will be seen from the above, it is easy for a director to accidentally breach section 216. The consequences are potentially serious. Mr Raine was a director of Furntex Limited trading as “Dreamsleeper” when it went into liquidation. His new company, Dreamsleeper Limited, also a bed company, failed leaving him disqualified as a director for 3 years, having to do community service and being personally liable for the second company’s debts of £200,000.
What is bad news for directors is good news for creditors. Whilst these provisions are often used by HMRC any person who is a creditor of the second company (even it were not a creditor of the first company) can pursue the director personally for monies owed by the second company if a breach of S216 has occurred. The action is brought by the creditor himself and any recoveries are for his benefit rather than for the benefit of the second company’s creditors generally. The procedure is fairly simple and there are no defences available judgment can be achieved on a summary basis, with the only limiting factor being the means of the director. Better still, the director may well not be able to set off any monies owed to the Company by the creditor as against his liability to that creditor.
Whilst creditors often complain about the apparent injustice of the phoenix company phenomenon S216 can potentially be turned to the advantage of a well informed creditor.
For advice on Section 216 of the Insolvency Act 1986 or insolvency matters generally please contact Andrew Garland on 0121 710 5941 or [email protected] or the insolvency team member you usually deal with.
This article contains information of general interest but does not give legal advice.