When a company enters insolvent liquidation, insolvency legislation prevents the same name or similar being used again by the company’s directors. This is known as ‘phoenixing’, and the penalties for doing it can be severe. However, there are certain exceptions to the rule, so we discuss the intricacies of this important issue in more detail here.
The prohibition on reuse of a liquidated company’s name was put in place to address the problem of ‘phoenixing’. The idea was to prevent a company running up debts, entering liquidation and then a new company being set up to continue trading whilst it appears to the outside world that nothing has changed.
To counteract phoenixing, for the five years following liquidation, any such director or shadow director may not be a director of, or take part in the “formation, promotion or management” of a company or business with a ‘prohibited name’, either directly or indirectly.
What is a ‘prohibited name’?
A ‘prohibited name’ is one that a company in insolvent liquidation has been known by in the previous 12 months before the date of liquidation. It also includes any name similar enough to appear that there is a link with the company in liquidation. This applies to both registered names and trading names.
Consequences of Using a ‘Prohibited Name’ after liquidation
Using a ‘prohibited name’ is a criminal offence so the consequences can be severe. A person who doesn’t follow these exceptions is liable to imprisonment, a fine, or both. They may also be held personally liable for the debts of the new company which uses the ‘prohibited name’.
Someone who agrees to be a director of a company using a ‘prohibited name’, or is managing such a business and acting on the instructions of someone they are aware is contravening the laws against phoenixing can be liable too, not just the director of the insolvent company.
What are the exceptions?
There are 3 exceptions under the Insolvency (England and Wales) Rules 2016 which allow the ‘prohibited name’ to be reused:
I am buying the business from a liquidator – what steps should I take to reuse the name?
Purchasing the business of the insolvent company is perhaps the most common way that a director is able to reuse the name. These are the steps you would need to take before reusing the name:
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