Can I re-use my company’s name or trading style after liquidation?

It is both common and natural for directors of insolvent companies to want to retain control of goodwill attached to the company’s name so they can use it again in connection with another business. This will often produce the best financial outcome not only for the directors, but also for the company’s creditors. On the other hand, creditors and the public at large also have a legitimate interest in being protected from so called ‘phoenix companies’ and the risk of unwittingly giving bad credit to directors who have been involved in a previous company failure.

Registered directors and anyone who has effectively been running a limited company without being formally registered as a director, must take great care to comply with the restrictions under the Insolvency Act 1986 otherwise they run the risk of personal liability, under both civil and criminal law. With forward planning and guidance as appropriate, however, directors can employ one of three perfectly lawful exceptions, which may allow them quite properly to ensure that the value in the name is not lost, and re-use it without fear of such undesirable consequences.

Any director or shadow director who wishes, after liquidation, to re-use their company name, or any other name by which their company was known in the preceding year, should ideally seek legal advice from solicitors who specialise in insolvency as soon as possible, and in any event before any formal resolution is passed to place the insolvent company into liquidation, and before any new company is set up under a name that is likely to be regarded as a prohibited name.

What is a prohibited name?

People who have, at any time in the year prior to the liquidation of a limited company, been a director or shadow director of that company before its entry into insolvent liquidation (i.e. Creditors’ Voluntary Liquidation (CVL) or Compulsory Liquidation (CWU)) are restricted for 5 years following liquidation from being a director of, being directly or indirectly concerned in or taking part in the promotion, formation or management of a business, and being directly or indirectly involved with the carrying on of any business (whether or not through a limited company itself), where the continuing business has the same name as, or a similar name to, any name by which the liquidated company was known.

Such prohibited names include the liquidated company’s registered name, trading name, trademark, brand, acronym, or any other name which is so similar that it suggests to an impartial observer an association with the liquidated company. The question of whether a new name is so similar as to be prohibited is ultimately one which would fall to be decided by the Court, but of course most similarities will be obvious.

For example, if a (fictitious) company called ‘Yellow Bird Holdings Limited’ entered into insolvent liquidation, its directors and shadow directors would be restricted from being involved with a company or unincorporated business such as sole trader business or partnership with the same or similar name or ones which use part of that prohibited e.g. ‘Yellow Bird Limited’, ‘Yellow Tree Limited’ or ‘Birdbox Limited’. It is arguable that this restriction extends to include names with direct references of the trading address of the liquidated company, e.g. ’12 Orchard Way Limited’ or ‘The Restaurant in the Orchard’, as this may in all the circumstances be considered enough to suggest an association with the liquidated company, depending on how the liquidated company business was referred to or otherwise known.

A trading name can even be prohibited if it is a person’s name, so for example Joe Bloggs might not be permitted to trade lawfully under his own name a sole trader if he previously traded as “J. Bloggs Limited”, although in practice a court would likely be sympathetic if Mr Bloggs no longer wished to avail himself of the privilege of limited liability

Possible penalties for the inappropriate re-use of a company name after liquidation

Most of the law on prohibited names is set out in s216 of the Insolvency Act. If s216 is breached, and if the director is unable to bring themselves under the protection of one of the statutory exceptions described below, there are likely to be criminal and/or civil consequences for the director, shadow director, and any other person involved in the management of a company acting or willing to act on instructions given by a person they know to be restricted from using the prohibited name, including but not limited to the following:

• criminal sanctions, including imprisonment or a fine or both;
• disqualification from acting as a company director for a specific period of time;
• personal liability for debts incurred by the new business using the prohibited name for the time when the person in breach of s216 is involved in its management; and/or
• personal liability for debts incurred by the new business using the prohibited name for the time the person acts on instructions given by a person they know are restricted by s216.

Exceptions to s216

Notwithstanding the above, under the Insolvency (England and Wales) Rules 2016, there are three statutory exceptions on which a director or shadow director may be able to rely as a legal foundation to lawfully re-use what would otherwise be a prohibited name.

1. First exception – notice to creditors (R22.4)

The first excepted case is that prior, formal notice can be given by the relevant person(s) to all creditors of the insolvent company that the director or shadow director intends to be involved in the management of a company which has purchased the whole or substantially the whole of the business from the liquidator, and then trade under what would otherwise be deemed a prohibited name, but for that notice to creditors.

The director or shadow director in a typical case, might choose to incorporate a NewCo called something completely generic (e.g. ABC987 Limited). Once the purchase of substantially the whole of the business from the liquidator has completed (noting that the sale contract must include prescribed wording), and the relevant notices (likewise containing specific wording) have been sent to every creditor by one of the permitted methods including formal advertisement at the London Gazette (in a prescribed form), the NewCo can then, and only then, begin to be known by and to trade under the problematic name.

If planned appropriately, the completion of the purchase and issuing notices can be timed to align with placing the insolvent company into liquidation, meaning that in practice, disruption to trade is minimised.

However, the first excepted case will almost certainly not be appropriate in the event that – prior to all required notices being formally given – the intended purchase vehicle has already been set up, registered or referred to in discussions with third parties, under what would be a prohibited name. We often see directors and accountants who have ‘jumped the gun’ in this way, and who therefore have to duplicate a level of cost as a result.

2. Second exception – application to court (R22.6)

The second excepted case is that an application to court is made by a director or shadow director for permission to be involved in a company with a prohibited name within seven days following the liquidation of the insolvent company. Provided that the application is made on time and is a genuine, properly crafted court application supported by evidence (failing which it may be rejected as an abuse of process), the director or shadow director is able to continue acting under a temporary safety net whilst the application is pending, for a maximum of six weeks after liquidation.

We have known directors who have inadvertently acted in breach of s216 apply successfully for permission to act under a prohibited name going forward, but technically the court has no jurisdiction to sanction a breach retrospectively, so there remains in these circumstances a risk of prosecution and/or personal liability for relevant debts for the period up to the date when the court grants permission. A court application is typically at least three times as expensive as directors availing themselves correctly of the first excepted case, and requires a large and urgent investment of time by the directors themselves. It also carries no guarantee of success.

Wherever possible, the first and third excepted cases will produce more favourable results, but a court application can sometimes be the only viable option, for example if a purchase and use of the name has taken place without prior notice having been given, or where only a small part of the business was capable of being purchased from the liquidator, but the seven-day period has not yet elapsed.

It should be noted that it is quite rare for the courts to be able to accommodate a full hearing, with the benefit of any input from the Secretary of State, within the six-week period stipulated, so in practice there is usually a preliminary hearing, or an order made on paper, with a view to granting temporary permission pending the full hearing.

3. Third exception – existing company already known by a prohibited name (R22.7)

The third excepted case is that a director or shadow director already has another limited company established and known by a prohibited name for at least 12 months before the insolvent company enters into liquidation. For this exception to work, the directors must confine themselves to acting within this particular company, which must not have been dormant at any point during the 12-month period.

This option is sometimes used when the sale of the whole or substantially the whole of the business completed over a year prior to the insolvent company’s liquidation, or where there are multiple group companies with common management which are known by similar names.

In our experience this exception is relied upon more often in circumstances where the director in question does not expect to trade a similar business to that undertaken by the liquidating company. The use of an existing, non-dormant vehicle in the same business is more often affected by reputational issues following the liquidation of the allied company, in contrast to a new company which is disassociated from the trading difficulties which gave rise to the liquidation. It is nevertheless useful to preserve the ability of sister companies to trade without having to undergo a full and expensive reorganisation, and without losing an important part of their existing management.

Key message to directors

The re-use of company names and trading styles by existing management following the liquidation of a company is fraught with difficulty and risk, but capable of being managed. With appropriate legal advice in place early, the options can be weighed carefully and the optimum course laid to navigate the issues and the pitfalls for the unwary. In most cases, with a relatively modest investment of time and resources proportionate to the value you may expect to derive from preserving them, it will be possible to re-use company names and trading styles which would otherwise be prohibited.

In practical terms, you should get solicitors on retainer at the same time as you confirm your engagement with insolvency practitioners to assist you with a CVL and/or discuss the terms upon which you will purchase the company’s assets. If your business is facing CWU, you should take legal advice as soon as you are served with a winding up petition and, if appropriate, your solicitors will be able to introduce you to insolvency practitioners who may be able to deliver a voluntary liquidation with a view to sale notwithstanding the petition.

We face an uncertain period of trading for a number of sectors in 2022, and inevitably some businesses will not be able to escape liquidation. Our aim through this blog is to help the directors of such companies – especially SMEs – to access solutions which allow business value to be preserved and productivity to recover.

If you would like to discuss any aspect of the above, please do not hesitate to get in touch with Lucy Andrews, Mike Pavitt or any other member of our Corporate Restructuring & Insolvency team – we would be delighted to assist you.

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