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Can directors start a new company / business with a name similar to a company that has entered insolvent liquidation?

directors starting up a company with similar name to insolvent liquidation company

There is no simple yes or no answer to this question so let us explain what can and can’t be done:

What you cannot do

If you have been a director or shadow director of a company for a period of 12 months preceding that company entering liquidation, insolvency legislation prohibits you from carrying out the following for a period of 5 years following liquidation:

  • Be a director of a company that operates with a similar name or trading style (close enough to suggest an association with the liquidated company)
  • Be involved in any way (directly or indirectly) in the promotion, formation or management of another company with a similar name or trading style
  • Be involved in any business which trades in a similar trading style as the company which entered liquidation

Breaching this legislation is a criminal offence and as a result leaves the person(s) involved liable to imprisonment and/or a fine, and possible disqualification from being a director in the future. As well as this, should the new company or business fail, leaving a shortfall to its creditors, then the person(s) involved may also be made personally liable for the shortfall to creditors.

As you can see the implications of breaching the legislation are pretty severe and justifiably.  The legislation is there to prevent dishonest directors simply setting-up companies in order to rack up debts that they never intended to pay, close them down and then set up another business to do the same thing over again. Most would agree that such phoenix operations should be prevented from being possible.

What you can do

However, all is not lost. The legislation also recognises that in some cases it is beneficial to allow individuals to restart a new business in a similar name or trading style.  These include where:

  • There are genuine reasons for the failure of a company
  • Despite any reputational damage that liquidation may cause, a value may remain associated with the company’s name/brand. In which case an appointed liquidator can sell it for the benefit of the company’s creditors. Often those willing to pay the most for the name and brand will have had some prior involvement with the insolvent company
  • Fully informed creditors approve a sale of the rights to use the insolvent company’s name and trading style
  • The success of a newly formed company or business, which will provide employment for those staff at risk of unemployment following the failure of the previous company as well as other wider social and economic benefits, may be dependent on its ability to use a similar name or trading style as well the active involvement of those who were directors of the company in liquidation.

As you can see, in the right circumstances the legislation does allow for the re-use of a company name and trading style. In essence, this can be summarised in the following two ways:

  1. Obtaining the rights to use the name and trading style from a liquidator of the insolvent company, together with its other assets (subject to creditor notification and approval)
  2. Letting creditors know of the intended use of a name or trading style (prior to its use) or an early application to Court to seek approval to use the prohibited name

So whilst re-use of a company name or trading style by former directors of a company which enters into liquidation is not allowed, with the correct professional advice and guidance it is possible to re-use a company name following liquidation.

Important – please note

This article only provides a summary of the legislation and should not be acted upon as sole source of reference and authority. It does not take into account any particular circumstances there may be which affect your eligibility to pursue this particular course of action. If this is a route you are intent on pursuing we recommend that you contact us for further information and free advice before going any further.

For more information and advice about the liquidation process and how it may affect you,  take a look at our resources section or get in touch.

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