Everyone is familiar with the ‘Phoenix from the Ashes’ syndrome where a company goes into liquidation or receivership and the main assets are sold to the directors of the old company who start up under a different name carrying on the same business.
In fact there are often good reasons why this should be permitted as long as it is handled fairly and at arms length.
However, there are a couple of very important "wrinkles" which regrettably are almost unknown even amongst solicitors.
Firstly, one has to watch out for Section 216 of the Insolvency Act of 1986. This effectively makes it very dangerous for a director of a company that has gone into insolvent liquidation to be a director of another company that is known by a similar name.
Thus, if your company was called Bloggs Ltd and it goes into insolvent liquidation, if you then buy the assets and start up in business again calling yourselves "Bloggs 2001 Ltd" (or some other name with "Bloggs" in the title) then you will be in breach of the legislation and, terrifyingly, personally liable for all of the debts of your new company!
There are two ways to overcome this personal liability. One involves making an application to the court within seven days of the company becoming insolvent and asking for leave (with an explanation as to why you should be permitted so to do) and the other involves doing a deal with the liquidator and notifying all of your creditors - again within a very strict timetable.
Worse than all of this is that if you are running two companies with similar names and one goes into liquidation what happens to the other? In the case of R-v-Cole (and others) Messrs. Cole, Lees and Birch were directors of East Africa Freight Lines Ltd. Six months before the company went into liquidation they set up another company called East Africa Lines Ltd. As the second company was not in existence more than 12 months before the first company went into liquidation they were not only personally liable for the debts of the new company but were also convicted of an offence under Section 216.
An oddity is that if an individual (as opposed to a Company) goes bankrupt then the same Insolvency Act which contains the prohibition on re-using company names actually compels the bankrupt to re-use his previous trading name. How peculiar!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
