Phoenix Companies - directors’ re-use of company names permitted
Section 216 of the Insolvency Act 1986 restricts the use by a Phoenix company or successor business of a similar name or trading style to that of a company in insolvent liquidation as reported in an earlier post.
Any director of the insolvent company who is involved in managing the successor, unless he has leave of the court and subject to the exceptions in rules 4.228 to 4.230 Insolvency Rules 1986, is both liable to criminal prosecution and personally liable (under s217) for the debts of the successor.
The first exception - when notice is given to creditors (rule 4.228) was found wanting by the Court of Appeal in Churchill & Churchill v First Independent Factors and Finance Ltd ( EWCA Civ 1623).
The draft Insolvency (Amendment) Rules 2007 have therefore been produced to substitute a new version of rule 4.228 with effect from 23 July 2007.
The new rule will enable a director - as had been intended but not achieved by the original rule - to give notice to creditors and so avoid contravening s216 if the insolvent company's business is acquired from an insolvency practitioner.
Most insolvency MBOs will therefore be able to avoid an application to court, provided the notice is given either:
- before the director becomes involved with management of the successor; or
- before the successor uses a prohibited name.
Circumstances in which an application may still be required include:
- where the director is involved with management of a business or a company using a prohibited name and there is no acquisition of the whole (or substantially the whole) of the insolvent company's business; and
- where the director is already a director of a company with a prohibited name, but that company has not been known by that name for 12 months prior to the date of liquidation or has been dormant during that period.
The complexities of these requirements mean that to be sure of avoiding the criminal and civil consequences of contravening s216, directors of insolvent companies who anticipate involvement with a similarly named business take specific professional advice about this issue.
Date: 28th June, 2007
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