Sadly, it is a well known fact that many businesses end up insolvent, whether through bad ideas, poor execution, or just bad luck. Even the most successful business people can find themselves facing insolvency and seeking solutions to save their business. However, should a company be ‘rescued’ from insolvency through liquidation or administrations, there are many complications associated with using the name of (or similar to) an insolvent company.
What is Section 216 of the Insolvency Act 1986?
Section 216 was introduced to combat phoenix companies and hold directors to account. Phoenixing refers to the liquidation of insolvent companies only for them to emerge as a new limited company, free of debt but carrying the same name and assets.
Under Section 216, phoenix companies are outlawed and it is a criminal offence for a director of a company that goes into insolvent liquidation from being involved in a new company of the same name for a minimum period of 5 years. Anyone found to be breaching these restrictions faces both criminal and personal liability.
Whilst Section 216 would seem to prevent a director from resurrecting an insolvent business in the form of a phoenix company, there are exceptions to the rule. In many cases, changing the name of a business is not an option, as this is needed to allow a new limited company to pick up where the old company left off. Instead Directors must rely on the following exceptions:
In the event that the insolvent business is being purchased from an Insolvency Practitioner, the directors of the new company can use a prohibited company name provided that they notify the creditors of the insolvent company as well as publishing the appropriate gazette notice. Needless to say, this exception to the law is difficult to comply with, especially if there is to be no break in trade, so guidance from Licensed Insolvency Practitioners is vital.
It may be possible to apply to the courts to request permission to use the name of an insolvent company. However, this process can be time consuming and costly.
Restrictions do not apply to directors of a company which has already been actively trading under the relevant name for 12 months before the insolvent company is liquidated. This exception to Section 216 prevents group companies from being caught out by restrictions, without creating loopholes for directors who seek to incorporate a phoenix company just a few months before insolvency is inevitable.
The Insolvency Service are taking an extremely proactive approach to investigating any potential breaches of the Insolvency Act, so if you are concerned that you could be liable for breaching the Insolvency Act, you should contact an Insolvency Practitioner for guidance.
In order to rescue a business with potential from insolvency, pre-pack administration is a common practice. A ‘pre-pack’ involves an arrangement agreed with the Insolvency Practitioner to allow directors to buy back the business and assets of the insolvent company whilst leaving the liabilities behind. Whilst phoenix companies are now outlawed, pre-pack administrations are completely legal, providing a legitimate solution, retaining maximum value from a failing business.
The Insolvency Practitioner is tasked with getting the best price they can for the business, however, in most cases, the business is sold back to the original directors. Pre-pack transactions will most often need to be finished in as little as a day, and although pre-pack arrangements may seem relatively simple, Section 216 must be considered.
Although Section 216 restrictions apply only to liquidations, it’s important to consider that administrations in many cases will lead to liquidations, so the use of prohibited names must be considered just the same.
Contact BEACON Licensed Insolvency Practitioners
If you are concerned that you may be guilty of breaking the law under section 216 of the Insolvency Act, or are looking for professional help in rescuing a business that is facing insolvency, contact BEACON today by calling 02380 651 441 or contact us here and we will get back to you as quickly as possible.
Whatever your business and whatever the financial challenges you face, we are here to help.