Company directors have a legal duty to ensure their business or organisation runs in accordance with the law – and are also trusted by those who have a vested interest in the organisation to do so.
Even if you resign, or the company ends up in the hands of insolvency practitioners, this responsibility continues.
This includes complying with the provisions within the Insolvency Act 986 and the Companies Act 2006, for example, the rules surrounding the reuse of a business name.
Business or trading names will often have value, personally or otherwise, to a company director, but these cannot simply be carried forward uninhibited.
There are only three circumstances where this can successfully be done, as governed by Section 216 of the Insolvency Act 1986.
So, what are the rules on reusing a business name?
Under Section 216 of the Insolvency Act 1986, directors of a liquidated company cannot use the same or a similar name for a new company or business for five years.
This applies to anyone who was a director (or shadow director) in the year before the liquidation began.
Failing to follow this rule could lead to:
- Fines or imprisonment
- Personal liability for debts of the new business
- Disqualification from acting as a director
Importantly, not knowing about this rule is not an excuse. Lack of knowledge is not a defence.
If you reuse a name without meeting the legal requirements, you could still be held accountable.
Are there exceptions to the rule?
Yes, there are three specific situations where directors can reuse a company name, without having to resort to a Court application.
- By notifying creditors: Where the insolvent company’s business or assets are sold to another entity involving the director, provided that prior notice of the reuse of the name is given to all creditors of the insolvent company before the person acts in contravention of section 216.
- Applying for court permission: If you apply to the court for permission within seven business days of the liquidation, you may use the name temporarily while waiting for a decision. The director or shadow director may then continue using the name between the date of the first company’s liquidation and the earlier of either the day falling six weeks after the start of the liquidation, or the day on which the court decides the application for permission.
- Using a name already in operation: If the new company has been using the same name for at least 12 months before the old company’s liquidation (and wasn’t dormant during that time), the restriction may not apply.
Lessons from Maxima Creditor Resolutions Ltd v Fealy
A recent High Court case, Maxima Creditor Resolutions Ltd v Fealy & Anor [2024], illustrates how the third of these exceptions work in practice.
The Situation
The directors of a liquidated company, McFee Interiors Limited, started trading under a similar name—McFee Limited. They claimed that the third exception applied because McFee Limited had been operating under that name for over 12 months before McFee Interiors went into liquidation.
The Court’s Decision
The court ruled in the directors’ favour – but not without scrutiny. The directors had to prove that McFee Limited was actively trading for the required period by providing detailed evidence, such as invoices and records. Such records are not always readily available in more informal, owner-managed businesses.
Key Takeaways for Directors
This case highlights the importance of understanding your responsibilities as a company director. Here’s what you should do to avoid trouble:
- Know your duties: Misconceptions about your responsibilities can land you in hot water. For example, your liability doesn’t automatically end when you resign or when the company enters liquidation.
- Keep thorough records: Maintain detailed financial records, invoices, and trading documents, as these could be vital in proving your compliance with the law.
- Seek legal advice early: If liquidation is on the horizon and you’re considering reusing a company name, consult legal experts to ensure you meet all requirements.
How Jacksons Can Help
Navigating insolvency and Section 216 restrictions can be complex. At Jacksons, we provide tailored legal advice to help directors understand their options and responsibilities. Whether you need guidance on the exceptions or advice on complying with the rules, we’re here to assist.
If your business is facing liquidation and you’re concerned about the reuse of a company name, don’t hesitate to get in touch with our experienced team.
For more information, call or email Ellie Honeyman at 01642 873749 or ehoneyman@jacksons-law.com.
