Well, the simple answer is yes and no! Let me explain…
Essentially insolvency legislation prohibits any person who has been a director or shadow director of a company at any time for a period of 12 months preceding that company entering liquidation from carrying out the following for a period of 5 years following liquidation:
* Be a director of a company that operates with a similar name or trading style (so close to infer an association with the liquidated company);
* Be involved in any way (whether that be directly or indirectly) in the promotion, formation or management of another company with a similar name or trading style;
* Be involved in any business which trades in a similar trading style as the company which entered liquidation.
Breaching this legislation is a criminal offence and therefore leaves the person(s) involved liable to imprisonment and/or a fine, and possible disqualification from being a director in the future. Also, should the subsequent company or business fail leaving a shortfall to its creditors, then the person(s) involved may also be made personally liable for the shortfall to creditors.
So the implications of any breach of the legislation are pretty severe and for good reason. The legislation is there to protect against unscrupulous directors who set-up companies only to rack up debts that they never intended or were ever realistically able to pay, close them down and set up a new phoenix operation to do the same again. Most would agree that those who operate in this way should be stopped from doing so.
Thankfully, the legislation also recognises that sometimes it is beneficial to allow individuals to restart a new business in a similar name or trading style. For example:
> Where there are genuine reasons for the failure of a company (which thankfully account for the vast majority of cases we see at Bailey Ahmad Business Recovery);
> That quite often, notwithstanding the reputational damage that liquidation may cause, there remains a value associated with the company’s name/brand that an appointed liquidator can sell for the benefit of the company’s creditors. Furthermore, often those willing to pay the most for the name and brand have had some prior involvement with the insolvent company;
> Where creditors are fully informed and approve a sale of the rights to use the insolvent company’s name and trading style;
> The success of a newly formed company or business, which will provide job opportunities for those staff at risk of unemployment following the failure of the previous company as well as other wider social and economic benefits, may be contingent on its ability to use a similar name or trading style as well the active involvement of those who were directors of the company in liquidation.
So, in the right circumstances the legislation allows for the re-use of a company name and trading style which can be summarised as follows:
* Acquisition of the rights to use the name and trading style from a liquidator of the insolvent company, together with its other assets (subject to creditor notification and approval)
* Either the appropriate notification of the intended use of a similar name and trading style following liquidation to creditors (prior to its use) or an early application to Court to seek approval to use the prohibited name.
So whilst there is a general prohibition on the re-use of a company name or trading style by former directors of a company which enters into liquidation, with the correct professional advice and guidance it is possible to re-use a company name following liquidation.
If you would like to know more on this topic, please do not hesitate to contact us on 020 8662 6070 for a free consultation.
To find out more about the changes in legislation and how it might affect you or your business, take a look at our blog post on modernising director disqualification.
DISCLAIMER: This blog is provided as a general guide and only provides a summary of the legislation. It does not take into account your particular circumstances and therefore should not be relied upon. Should you feel that you need specific advice in this area please contact us for a free initial consultation.