When a company enters liquidation, directors are often keen to move on and establish a new business. While there may be opportunities to continue trading in a different structure, one area that frequently catches directors by surprise is the restriction on re-using the name of the insolvent company.
The rules surrounding prohibited company names are designed to protect creditors and prevent confusion in the marketplace. Failing to comply can expose directors to criminal sanctions, personal liability and director disqualification, making it essential to understand the legal position before taking any action.
Why are directors prevented from re-using a company name after liquidation?
The restrictions exist to ensure transparency for customers, suppliers and creditors. Once a company has entered insolvent liquidation, those dealing with a new business should be able to distinguish it from the company that has failed.
Without these safeguards, a new business could continue trading under the same or a very similar name, giving the impression that it is the same legal entity. This could mislead customers and suppliers into believing they are dealing with the original company or that its outstanding liabilities have been resolved.
The legislation seeks to prevent this type of confusion and protect those who may otherwise suffer financial loss.
What is a prohibited company name?
A prohibited name is not limited to the exact registered name of the company that has gone into liquidation. It can also include names such as the registered name of the company used during the 12 months before liquidation, any trading name used during that period, and any name so similar that it suggests an association with the liquidated company.
These restrictions apply where the new company or business carries on the same, or a similar, type of business as the insolvent company.
For example, if Jane Brown Cakes Limited, trading as Jane’s Cakes, entered liquidation, the following names would likely be prohibited:
- Jane Brown Cakes Limited
- Jane’s Cakes
- Jane Brown’s Cakes (2020) Limited
- Brown’s Cakes
- other similar variations which imply a connection with the former business.
The courts have also demonstrated that the rules are interpreted broadly. For example, Air Equipment Co Limited was found to be a prohibited name when used by a successor business to Air Component Co Limited, while Walsh Construction Limited was held to be prohibited following the liquidation of SG&T Walsh Company Limited.
Who do the restrictions apply to?
The prohibition applies to anyone who was a director of the company or acted as a director (commonly referred to as a shadow or de facto director), during the 12 months before the company entered insolvent liquidation.
The restrictions remain in place for five years following the liquidation.
During that period, an affected individual cannot act as a director of a company using the prohibited name or be involved in the management of a business trading under that name.
What are the consequences of breaching the rules?
The consequences of breaching the legislation are significant and can affect directors personally.
A director who acts in contravention of the restrictions may commit a criminal offence resulting in the possibility of a fine or imprisonment, be ordered to pay compensation, face director disqualification proceedings and become personally liable for the debts of the successor company or business.
Personal liability is often the most significant consequence. Instead of the company being responsible for its own liabilities, the individual director may find themselves personally accountable for business debts.
Can anyone else be held liable?
Anyone involved in managing the successor company or business who knowingly acts on the instructions of a director using a prohibited name may also become personally liable for the debts of that company or business.
This means that employees, managers and other individuals involved in running the business should ensure they understand the rules before continuing to trade.
Are there any exceptions?
There are limited circumstances where the prohibition does not apply.
For example, an exception may be available where the successor company had already been trading under the relevant name for at least 12 months before the liquidation of the insolvent company.
Another exception can arise where the director acquires the business from the liquidator and complies with the statutory requirements, including giving the appropriate notice to all creditors within the prescribed timescales.
Alternatively, a director may apply to the court for permission to use the prohibited name. Importantly, that application must generally be made within seven days of the liquidation, making early legal advice essential.
As these exceptions involve strict procedural requirements and time limits, directors should seek specialist legal advice before continuing to trade.
Seeking legal advice at an early stage
Whether you are planning to establish a new business following liquidation or have concerns about a company already using a similar name, obtaining advice early can help avoid costly mistakes.
If you are a director of a company facing liquidation, our Commercial Litigation team are ready to provide support and advice. Call us on 0161 930 5151, email us at enquiries@gorvins.com, or fill in the online form. Getting advice before making any decisions can help protect you from unnecessary legal and financial risk.