What Counts as a Prohibited Company Name Under Section 216?

When a company enters insolvent liquidation, directors must be very careful about the name of any new business they become involved in. Section 216 of the Insolvency Act 1986 places strict restrictions on the reuse of company names following liquidation. Failing to follow these rules can result in serious consequences, including personal liability for company debts and even criminal penalties.

What Is Section 216?

Section 216 applies when a company has gone into insolvent liquidation. It prevents a director, or shadow director, of that company from being involved in another company that uses a “prohibited name” for a period of five years following liquidation.

The purpose of this rule is to protect creditors and prevent what is commonly known as “phoenixing”, where a business closes with debts and then reopens under the same or a very similar name, leaving creditors misled or unpaid.

What Is a Prohibited Name?

A prohibited name is broadly defined under the legislation and includes:

1. The same name as the liquidated company

If the new company uses exactly the same registered name as the company that entered liquidation, this will automatically be prohibited unless an exception applies.

2. A name that is so similar it suggests an association

Even if the name is not identical, it may still be prohibited if it is so similar that it suggests a connection with the old company. For example, slight spelling changes, added words, or minor alterations may still fall within the scope of Section 216 if the overall impression is that it is the same business.

3. The trading name of the liquidated company

Section 216 does not only apply to registered company names. If the old company traded under a different business name, using that trading name, or a similar version of it, can also be caught by the rules.

The key test is whether the name would give the impression that the new company is connected with the old insolvent company.

Who Is Affected?

The restriction applies to anyone who was a director or shadow director of the insolvent company in the 12 months prior to liquidation. It covers involvement in the management, formation, or promotion of a new company using a prohibited name.

This means a former director cannot simply resign and allow someone else to register the new company while still being involved behind the scenes.

Are There Any Exceptions?

There are limited exceptions where a prohibited name can be reused legally:

The new company purchases the whole, or substantially the whole, of the business from the liquidator and proper notice is given to creditors.

The new company has already been known by that name for at least 12 months before the liquidation, and was not dormant during that time.

The director applies to the court for permission to use the name within seven days of liquidation.

Strict procedural requirements apply to these exceptions, and failure to comply can invalidate the protection.

What Are the Consequences of Breach?

Breaching Section 216 is a criminal offence. More importantly, a director who is involved in a company using a prohibited name without permission can become personally liable for the debts of that new company. This removes the protection of limited liability and can expose the individual to significant financial risk.

Final Thoughts

Section 216 is designed to protect creditors and maintain transparency in the insolvency process. Directors considering starting a new business after liquidation should always seek professional advice before choosing a company name. Understanding what counts as a prohibited name can prevent costly mistakes and serious legal consequences.

Location: London, UK

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