When a company (“Oldco”) enters an insolvency process, the former directors of that company will often be best placed to make an offer to purchase from the insolvency practitioner, the business and assets of the company.
In order to maintain the goodwill associated with Oldco the directors will often choose to trade the new company with a name which is similar to Oldco.
In this situation, section 216 of the Insolvency Act 1986 (the “Act”) places restrictions on the directors of Oldco, in their personal capacity, such that they cannot be concerned either directly or indirectly with the promotion, formation or management of a company with a similar name to Oldco – this includes a similar trading style.
The aim of section 216 is to protect consumers and potential suppliers of Newco who may otherwise believe, incorrectly, that Oldco and Newco were one and the same company.
There are 3 specific exemptions to this restriction which are available to the directors of Oldco and it is extremely important for the directors to take advice on these exemptions before Newco begins to trade.
If the directors do not take advantage of the exemptions and act in a way that breaches section 216 of the Act, the potential consequences include:
1. Civil sanctions including personal liability for the debts of Newco if that company also becomes insolvent; and
2. Criminal sanctions including up to 2 years imprisonment; a £5,000 fine together with disqualification from acting as the director of a limited company for up to 15 years.
It is not a defence to such a claim that the director was not aware of this section or that they did not intend to mislead their customers or suppliers.
This firm recently acted for the director of a limited company in such circumstances who sought advice when they were served with notice of a criminal prosecution.
As a result of our intervention the director was not subject to imprisonment or a fine but was disqualified for a period of 1 year.
It is inevitable when directors are involved with a company which is insolvent and the assets of the insolvent company are being purchased or a new venture is being started that there aren’t enough funds for everything. In these circumstances the directors have difficult decisions about what costs to prioritise.
Professional costs can be seen as a ‘nice to have’ rather than a ‘must have’.
Be careful! The costs of advice at the outset will be significantly less than dealing with proceedings for a breach of section 216.
To put it another way, what would you be willing to pay for advice that will prevent criminal sanctions including imprisonment?