When a company goes into insolvent liquidation, section 216 of the Insolvency Act 1986 restricts its directors and any shadow directors from being involved in any company or business with the same or a similar name as the company in liquidation. A breach of section 216 may lead to civil and/or criminal liability which are automatic, namely, of the conditions for liability are met, the court has no discretion to limit that liability.
In this article I will briefly consider:
- The scope of the restrictions;
- The statutory exceptions to it;
- Applications for the court for leave to act where the restrictions apply.
What is restricted by section 216?
Section 216 was enacted to counter the “phoenix syndrome”, where a new company is set up, trading under a similar name as an insolvent company, with the insolvent company’s assets and management but free from its liabilities and exploiting its goodwill and business opportunities.
To whom does the restrictions apply?
Subject to certain exceptions, section 216 restricts a director or shadow director of a company in liquidation, at any time within five years beginning with the start of the liquidation, from:
- Being a director of any company known by a prohibited name.
- Being concerned or taking part in the promotion, formation or management of such company.
- Being concerned or taking part in the carrying on of a business that is carried on under a prohibited name.
The restrictions do not apply to directors or shadow directors of companies liquidated on a solvent basis.
What names are prohibited?
- A name is prohibited if it is the same as the name of the liquidated company or if it is so similar as to suggest an association with that company.
- Trading names are also covered by the prohibition.
The test of similarity is objective and is a question of fact for the court.
Statutory exceptions
Giving notice to creditors:
- the prohibition will not apply where the insolvent company’s business is sold to another entity in which a former director plans to be involved, if that person gives notice to all creditors of the
insolvency company before they are in contravention of section 216.
Temporary protection while application is made:
- Provided a director or shadow director applied for the court’s permission within seven business days from the date of the first company’s liquidation, the director/shadow director may act between the start of the first company’s liquidation and the earlier of the date falling six weeks after the start of the liquidation or, when the court has decided the application.
Company already known by a prohibited name:
- Where the second company that has a prohibited name has been known by the prohibited name for at least 12 months before the insolvent company goes into liquidation. This exception is helpful where a sale of the insolvent company’s business is concluded more than a year before the insolvent company goes into liquidation.
Even if a statutory exception does not apply and a director is technically in breach of s.216 it may still be possible to apply to court for an exemption provided that notice is given to the liquidators and creditors of the company in liquidation and neither objects to the application being made.
