Summer 2010
Phoenix Operations and Restrictions in the Re-use of Names
Not all legitimate businesses succeed at the first attempt. A business can fail for any number of reasons and there are occasions when honest individuals find they can no longer trade out of their difficulties.
In these cases, the use of a Phoenix company can allow a business to start again and for the profitable elements to survive, offering some continuity for both suppliers and employees.
The process involves the assets of a failed company being moved to another legal entity. Often some or all of the directors remain the same and in some cases, the new company has the same or a similar name to the failed business. The Phoenix will operate in the same sphere as its predecessor.
Understandably there are those who harbour doubts as to the legality of Phoenix companies. This is due in the main to a minority of directors abusing the process by either forcing the company into liquidation and buying the assets back at a reduced price or transferring the assets prior to insolvency at less than market value. However the strict rules contained in the Insolvency Act 1986 and the powers conferred on the liquidator ensure that these abuses do not occur frequently.
If the directors wish to use the same or a similar name they should be aware of the restrictions in place and penalties for non compliance contained in sections 216 and 217 of the Insolvency Act 1986. This is a complex area and beyond the scope of this article but broadly the rules are:-
- It is an offence for a person who has within 12 months of the day of the liquidation been a director or a shadow director of a company in insolvent liquidation, for a period of five years, to be a director or involved in any way in the management of any other company or business carried on under or known by a prohibited name, without leave of the court. The key here is the definition of a prohibited name, which is any name by which the liquidated company was known at any time in the 12 months prior to the liquidation, or any name so similar as to suggest an association with that company.
- Section 217 of The Insolvency Act 1986 provides, amongst other things, that a person who is involved in the management of a company (or a person acting on instruction of someone) in contravention of Section 216 of The Insolvency Act 1986 is personally liable for the debts of the company that are incurred during the period of that involvement. This can be a real problem for a company director who wishes to carry on with essentially the same business.
There are 3 exceptions to this prohibition:
- Where a company acquires the whole or substantially the whole, of the business of an insolvent company, under arrangements made by an insolvency practitioner acting as its liquidator, administrator or administrative receiver, or as supervisor of a voluntary arrangement.
Creditors of the affected company must be notified.
- Where an individual affected by section 216 applies for leave of the court to use the prohibited name. There are strict time limits here.
- The court’s leave is not required where the company, though known by the prohibited name within the meaning of the section has:
- been known by that name for the whole period of 12 months ending with the day before the liquidating company went into liquidation, and
- has not at any time in those 12 months been dormant.
Simon Parker is a chartered accountant and licensed insolvency practitioner.
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