Defined under Section 216 of the Insolvency Act 1986, a Prohibited Name is a company name that is either identical to, or very similar to that of an insolvent company, suggesting an association with that company.
Under Section 216, other than in certain circumstances, anyone who has been a director of an insolvent company within 12 months of its liquidation, is restricted by law from becoming involved in another company using the same or similar name for 5 years following the date of liquidation. Should this law be breached, then directors are personally liable for the relevant liabilities of the insolvent company.
If you are a director of or have been involved in the formation or management of a company with a prohibited name and were also a director of the liquidated insolvent company, it’s important to be aware of debts that you could potentially be liable for, along with the exemptions to Insolvency Act restrictions.
The consequences for breaking restrictions for using a Prohibited Name
There are 3 ways that directors of a company with a prohibited name can be exempt from the debts and liabilities of the previous insolvent company.
- Firstly, a company wishing to use the prohibited name proposes to continue the insolvent company’s business and purchases it from the administrator or liquidator, whilst also giving prior notice to the insolvent companies creditors and publishing a notice in the Gazette.
- Secondly, directors can apply to the court for permission to be involved in a new company set up using the prohibited name of a liquidated insolvent company.
- Lastly, if the company that wishes to use a prohibited name has already been known by that name for more than 12 months prior to the insolvent company entering administration or liquidation procedures, and has continued to operate continuously during this time.
Should an individual act as director, or take part in the formation or management of a company using a prohibited name outside of the above exemptions, then the consequence is that they take personal liability for the relevant debts of the insolvent company under Section 217 of the Insolvency Act. Furthermore, they would also be jointly liable with the company responsible for those debts, along with any other individual(s) to have breached the restrictions stated in Section 216.
In addition to the above, guilty parties could also be liable for further serious consequences, such as an additional fine, imprisonment, or potentially both.
What are ‘Relevant Debts’?
Under Section 217 of the Insolvency Act 1986, relevant debts are all liabilities incurred during the time that an individual was a director of or involved in the management of a company in breach of the restrictions set under Section 216. When all liabilities are factored, they could be serious, so if you are worried about your involvement in a company using a prohibited name, it’s important to seek advice as soon as possible.
Seeking Advice from Insolvency Practitioners
If you are director of a company using a name that is the same or similar to an insolvent liquidated company that you were previously involved in, and are unsure about the debts that you could be liable for, you can contact BEACON Licensed Insolvency Practitioners to arrange a consultation.