Phoenix from the Ashes Companies

Whats in a Name?

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 an offense 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 1998 Ltd" then you will be in breach of the legislation and, terrifyingly, personally liable for all of the debts of the original Bloggs Ltd.!

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 recent 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 liable for the debts of the first company but were also convicted of the offense under Section 216.

An oddity is that if an individual 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 odd!

It pays to think carefully before naming your company. If you require further information on this topic please contact Keith Turner on 01604 622101 or email companylaw@turner-coulston.co.uk.