Sections 216 and 217 of the Insolvency Act impose draconian sanctions on directors of liquidated companies who reuse "prohibited names". Prohibited names are names that are identical to, or "suggest an association with", a company that has gone into liquidation and of which they were previously directors. The sanctions include criminal penalties and personal liability for debts. It has always been difficult for advisers to confidently advise directors whether a proposed name for a new company would be a prohibited name, given the vague nature of the phrase "suggest an association". Since the sanction for getting this wrong is so severe, advisers will naturally err on the side of caution.
In the Outer House case of Advocate General for Scotland -v- Reilly, Lord Bannatyne gives some guidance in this area.
Specifically he has identified that one must consider all of the circumstances relating to the business of the new company and the liquidating company. Whether a name is a "prohibited name" is not just down to an analysis of whether similar words are used in the corporate or trading names. In this case, both companies used the word "Aquaseal" (or a variant thereof). However, the judge also looked at the fact that the two companies carried on similar (if not identical) trades and also that their place of business (Glasgow in both cases) was the same. These factors allowed his Lordship to conclude that the name of the newco did indeed "suggest an association" with the liquidated company. The implication may be drawn from this case, however, that if the "other" circumstances had been sufficiently dissimilar, the mere use of the word "Aquaseal" alone might not have been sufficient to bring this matter within the ambit of s 216.
Comment
No doubt the case is of some assistance to practitioners but, the vague nature of the wording in section 216, coupled with the strong punitive sanctions in section 217, will surely remain a strong disincentive from risking the use of key words in these situations.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
