Insolvency Act 1986 - Use of Prohibited Names

1 Introduction
2 S 216
3 Section 217
4 Thorne v Silverleaf (1994)
5 Related articles on Designing Buildings Wiki

[edit] Introduction

It is a common fact of life that companies fail and are wound up or liquidated leaving unpaid creditors in their wake. It is also true that new companies appear soon thereafter operated by the same individual(s) who presided over the failed company, but now free of the debts which brought the previous company down. Such new companies are often referred to as 'Phoenix companies' – rising from the ashes of what went before it.

However, there is a little-known danger that exists for individuals who are associated with both companies and who make the mistake of giving their new company a name that is too similar to that of the failed company. The consequences of doing so can result in an individual becoming personally liable for any debts of the new company in the event that that company fails to do so. Furthermore, imprisonment or fines may also be decided by the Court.

The relevant sections of The Insolvency Act 1986 are as follows:

[edit] S 216

(1) This section applies to a person where a company ('the liquidated company') has gone into insolvent liquidation on or after the appointed day and was a director or shadow director of the company at any time in the period of 12 months ending with the day before it went into liquidation.

(2) For the purposes of this section, a name is a prohibited name in relation to such a person if:

(a) it is a name by which the liquidating company was known at any time in the period of 12 months, or
(b) it is a name which is so similar to a name falling within paragraph (a) as to suggest an association with that company.

(3) Except with leave of the court or in such circumstances as may be prescribed, a person to whom this section applies shall not at any time in the period of 5 years beginning with the day on which the liquidating company went into liquidation:

(a) be a director of any other company that is known by a prohibited name, or
(b) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any such company, or
(c) in any way, whether directly or indirectly, be concerned or take part in the carrying on of a business carried on (otherwise than by a company) under a prohibited name.

(4) If a person acts in contravention of this section, they are liable to imprisonment or a fine or both.

(5) In subsection (3) 'the court' means any court having jurisdiction to wind up companies; and on an application for leave under that subsection, the Secretary of State or the official receiver may appear and call the attention of the court to any matters which seem to be relevant.

(6) References in this section, in relation to any time, to a name by which a company is known are to the name of the company at that time or to any name under which the company carries on business at that time.

(7) For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

(8) In this section 'company' includes a company which may be wound up under Part V of this Act.

[edit] Section 217

(1) A person is personally responsible for all the relevant debts of a company if at any time:

(a) in contravention of section 216, they are involved in the management of the company, or
(b) as a person who is involved in the management of the company, acts or is willing to act on instructions given (without the leave of the court) by a person whom they know at that time to be in contravention in relation to the company of section 216.

(2) Where a person is personally responsible under this section for the relevant debts of a company, they are jointly and severally liable in respect of those debts with the company and any other person who, whether under this section or otherwise, is so liable.

(3) For the purpose of this section the relevant debts of a company are:

(a) in relation to a person who is personally responsible under paragraph (a) of subsection (1), such debts and other liabilities of the company as are incurred at a time when that person was involved in the management of the company, and
(b) in relation to a person who is personally responsible under paragraph (b) of that subsection, such debts and other liabilities of the company as are incurred at a time when that person was acting or was willing to act on instructions given as mentioned in that paragraph.

(4) For the purposes of this section, a person is involved in the management of a company if they are a director of the company or concerned, whether directly or indirectly, or takes part, in the management of the company.

(5) For the purposes of this section a person who, as a person involved in the management of a company, has at any time acted on instructions given (without the leave of the court) by a person whom they knew at that time to be in contravention in relation to the company of section 216 is presumed, unless the contrary is shown, to have been willing at any time thereafter to act on any instructions given by that person.

(6) In this section 'company' includes a company which may be wound up under Part V.

In summary, Sections 216 and 217 of the Act prescribe that a director can be imprisoned, fined and made personally liable for debts if they breach those sections by wrongly reusing a prohibited name.

[edit] Thorne v Silverleaf (1994)

A director of a successor phoenix company business will have personal liability for debts of the successor company if the insolvent predecessor company's name is improperly reused. Improper reuse of an insolvent company's name is a breach of Sections 216 and 217 of The Insolvency Act 1986 and serious implications arise - Imprisonment, fine and personal liability.

Mr Thorne was a director of three companies over many years:

Mike Spence (Reading) Limited
Mike Spence (Motorsport) Limited
Mike Spence (Classic Cars) Limited

The first two of these three companies had previously gone into liquidation with Mr Thorne as a director. Mike Spence (Classic Cars) Limited was then formed and substantial monies procured from a Mr Silverleaf under an oral joint venture agreement. Mr Silverleaf became operationally involved in the affairs of the company.

The court held that the name of the company was so similar to the previous two as to make it a prohibited name under Section 216 (2) of The Insolvency Act 1986.

As Mr Thorne was a director of the first two companies in the 12 months preceeding their liquidation and went on within five years of their liquidation to be a director in a company with a prohibited name, he was liable to criminal sanctions under Section 216 (4). Mr Thorne as a person involved in the management of a third company was jointly and severally liable for its liabilities incurred at the time of his involvement, along with the company and any other persons liable (Section 217).

Although the sections go further than is required to curb the 'Pheonix Syndrome' the Court has no discretion to withhold their application. Mr Thorne's argument that Mr Silverleaf is aiding and abetting the crime should be precluded by public policy from profiting from his own wrong, was rejected for three reasons:-

Public policy will not automatically intervene in every crime or wrong committed by a person.
Mr Silverleaf had not profited as he was entitled to the debt in any event.
In any event, Mr Silverleaf had not, in the view of the Court, aided and abetted as he had only participated in the management of the company to the extent that many institutional lenders would to monitor a loan.