In the aftermath of liquidation, company directors can face personal liability and disqualification. There is also an automatic prohibition on them running another company with a similar name. Why the separate ban and what happened to these directors? Down with the laundry Direct Laundry Installations Ltd (DLI), a gas fitting company, went into creditors’ voluntary liquidation in October 2015. A couple of months beforehand, its directors (M and F) incorporated a second company through which they continued their activities, Direct Laundry and Steam Installations Ltd (DLSI).
Directors in trouble
The Insolvency Service’s investigation into M and F’s conduct revealed several breaches of duty. As well as failing to hand over the company’s books and records to the liquidators. They had faked an invoice from DLSI to justify the transfer of £68,000 from DLI’s bank accounts. They failed to pay a £12,000 fine for dangerous, unlicensed gas work.
The name game All directors of a company in liquidation are prohibited by s.216 Insolvency Act 1986 from running another business with the same or a similar name as their liquidated company. This prohibition runs for five years from the start of the insolvent company’s liquidation.
If the active company has been known by the prohibited name for at least twelve months preceding the other company’s liquidation (and has not been dormant during that period), use of the name is not within the scope of the prohibition. DLSI was only incorporated three months before DLI’s liquidation, however, so couldn’t be exempt.
The prohibition aims to prevent directors from ditching their business’ liabilities in the liquidated company. It also aims to prevent them carrying on as if nothing has happened through a clean company. So-called “phoenixism” can be a legitimate recovery strategy but can also put members of the public and other businesses at risk of dealing with a company that is poorly, or even fraudulently, run. Therefore, the use of phoenix companies is only permitted in deserving cases.
Before re-using a company’s name, seek advice from a solicitor or insolvency professional. Unless the name is exempt, you’ll need to apply to the court for permission or follow a set procedure under the Insolvency Rules. The offence is strict liability, so unauthorised use of the name is a breach, even if your intentions are honourable.
Same or similar The similarity between the two names is judged by whether members of the public would associate the two companies in all the circumstances. Looking at factors such as the types of product/services, locations of the businesses, the customer base and individuals running the companies.
This wide interpretation meant that M and F carrying on DLI’s business through DSLI brought them within the ambit of the prohibition.
Liability A breach is a criminal offence, punishable by imprisonment and/or a fine. Directors can also be held personally liable for any of the new company’s debts incurred while they were involved.
A breach can also lead to disqualification. M was sentenced to eight months in prison, suspended for two years, 250 hours of unpaid work and disqualified for five years. F received an 18-month community order, was ordered to carry out 120 hours of unpaid work and was disqualified for three years.
Liquidation is often caused by directors’ mismanagement or even fraud. The prohibition on re-using a company’s name helps to limit any further risk to the public. While the directors’ conduct is investigated. The directors were caught in breach of the name prohibition and other duties and were sentenced and disqualified.
Being a company director comes with responsibilities. Read more here.