Using the same or similar name of a company that is in insolvent liquidation is prohibited by s 216 of the Insolvency Act 1986 (IA).
A director who acts in breach of s216 by being a director of, or being involved in the promotion, formation or management of a company that is using a prohibited name, risks personal and potentially criminal liability (s217 IA 1986) – unless one of three “excepted cases” set out in the Insolvency Rules 2016 (Rules) applies.
The purpose behind s216 IA was to stop the so called “phoenix” syndrome whereby a shelf company was brought to life using the same or similar name to a company that has gone into liquidation by the same directors. The prohibition and risk for acting in breach of s216 was therefore aimed at preventing directors from liquidating one company (often after having run up significant debt) and then continuing business under the guise of a new company which, to the outside world, appeared to be the same company they had always done business with. The directors would be protected by the limited liability status of the new shelf company and trade on the goodwill of the liquidated company – all at the expense of creditors.
Although not all companies using the same or similar name are “phoenix” companies, there is no easy way to distinguish between the good and the bad cases. This is why s216 and 217 of the IA are so widely drawn (to capture all potential cases) but is also the reason why there are exceptions.