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Understanding prohibited names under Section 216
Navigating the rules around company names after liquidation can be one of the most confusing and high-risk challenges a director will face. Section 216 of the Insolvency Act 1986 sets out strict prohibitions on the reuse of a company name to protect creditors and prevent directors from simply walking away from debts.
This guide breaks down what a “prohibited name” is, who the rules apply to, and the legal pathways that allow you to move forward without risking severe personal and financial penalties.
We can assist you to remain compliant with the law and to avoid any personal repercussions.
The purpose of Section 216
The primary goal of Section 216 is to prevent a practice commonly known as “phoenixing.” This is where a director of an insolvent company (let’s call it Company A) sets up a new business (Company B) with the same or a very similar name. They transfer the valuable assets to the new company but leave the debts behind with the old, now-liquidated, entity.
This practice can mislead suppliers and customers, who may continue to trade with the new company believing it is the same one they dealt with before. Section 216 aims to increase transparency and ensure that directors cannot unfairly benefit from a failed company’s reputation while its creditors go unpaid.
While the law is designed to stop abuse, it also recognises that many directors wish to rescue a viable business in good faith. Understanding the rules is the key to doing so legally as failure to comply can have serious implication on company directors.
What is a prohibited name?
A name becomes “prohibited” if it meets two conditions:
- It is the name under which the insolvent company was known at any time in the 12 months before it entered liquidation.
- It is a name so similar that it suggests an association with the insolvent company.
This applies to both the registered name at Companies House and any “trading as” names the company used. The test is not just about the exact wording but about the impression it gives to the public.
Practical Example:
If “Section 216 Insolvency Act Ltd” goes into liquidation, the following names would likely be considered prohibited for its former directors:
- Section 216 Ltd
- S216 Insolvency Act Ltd
- S216 Limited Ltd
However, a completely different name, like “Insolvency Law Compliance Ltd ” would not be prohibited.
But it must also be noted that the following would be a prohibited name:
- Insolvency Law Compliance Ltd t/a Section 216
Who is affected by the rules?
The restrictions apply to any person who was a director or a shadow director of the insolvent company at any point in the 12 months leading up to its liquidation. A shadow director is someone who was not officially appointed but whose directions or instructions the board were accustomed to following.
If you fall into this category, you are restricted for five years from the date of liquidation from:
- Being a director of another company that is known by a prohibited name.
- Being involved, directly or indirectly, in the formation, promotion, or management of such a company.
The risks of non-compliance
Breaching Section 216 is a serious matter. The consequences are severe and can have life-altering financial and legal implications.
- Personal Liability (Section 217): If you are involved in managing a company with a prohibited name without court permission or falling under an exception, you can become personally liable for the debts the new company incurs during that time. This removes the “limited liability” protection that a company structure normally provides.
- Criminal Prosecution: A breach of Section 216 is a criminal offence. It can lead to a fine, a prison sentence, or both.
- Disqualification: You could be disqualified from acting as a director for an extended period of time.
How to legally reuse a company name: the three exceptions
The law provides three specific gateways that allow a director to legally reuse a prohibited name. These exceptions require strict adherence to procedure. The rules can be found in detail here: The Insolvency (England and Wales) Rules 2016
1. The “Notice Exception” (Rule 22.4 of the Insolvency (England and Wales) Rules 2016)
This is the most common route. It allows you to use a prohibited name if your new company acquires the whole, or substantially the whole, of the business of the insolvent company from its Liquidator.
To use this exception, you must prepare and deliver a formal notice to every creditor of the old company and publish the same notice in the Gazette. We can assist with this.
Crucially, this notice must be sent and published within 28 days of the new company acquiring the business. Missing this deadline renders the exception invalid.
2. Court Permission (Rule 22.6 of the Insolvency (England and Wales) Rules 2016)
You can apply to the court for permission (known as “leave”) to use a prohibited name. This application should be made within 7 days of the company going into liquidation. The court will consider the circumstances, including how the old company failed and the proposed structure of the new one, before deciding whether to grant permission. We can assist with this.
3. The "Existing Use" exception (Rule 22.7 of the Insolvency (England and Wales) Rules 2016)
This exception applies if your new company has already been operating and known by the prohibited name for at least 12 months before the old company went into liquidation, and it has not been dormant during that time. This is a less common scenario, typically used where two separate group companies with similar names have been trading for some time.