The Rise of the Phoenix

You’ve heard of a phoenix, it’s the mythical bird from Harry Potter. It dies, or at least you think it’s dead, but in the next scene, it’s back, having risen from the ashes. It looks the same and has the same name, but is it all it seems?

For debt collectors and credit managers, it can be the same with customers, with the difference being that you don’t see the burning, and are often unaware of the rising – the result being that you are actually now trading with a completely different legal entity, and the previous entity, the one that owes you all the money is nothing but a pile of ashes. The rise of this phoenix is not the kind of magic you want to dabble in.

You’d think that there would be rules in place to stop a director of a limited company from liquidating his company in order to try and avoid debts, or allowing it to be wound up, and then just carrying on as if nothing had happened, albeit with a slightly different name (and perhaps a bracket here and there). Thankfully there are…

The legal bit

Section 216 of the Insolvency Act (“the Act”) places a restriction on re-use of company names when a company goes into liquidation. Such names are called ‘prohibited names’ and are names by which the liquidating company was known at any time during the 12 months before liquidation, or a name similar to that name, so as to suggest an association with the company.

It applies to any person who is a director of a company that goes into insolvent liquidation (“the Former Director”), in the 12 months before liquidation. It does not apply in the case of an administration, unless a liquidation follows.

It states that the Former Director cannot be a director of a company with a prohibited name for 5 years from the date that the first company went into liquidation, and neither can they be in any way (directly or indirectly) concerned or take part in the promotion, formation, or management of any such company. Likewise, they cannot take part in the carrying on of a business (not limited) under a prohibited name.

The consequences of contravention of these rules can be imprisonment, a fine or both.

Section 217 of the Act also states that a person contravening section 216 can potentially be held personally liable for relevant debts, if at any time he is involved in the management of a company with the prohibited name, or is a manager of the  prohibited name company and acts on the instructions of someone, knowing that the instructor is in contravention of section 216.

Relevant debts are such debts of the prohibited name company incurred at the time that the person was involved in managing it.

Exceptions to the rules

There are exceptions to these rules which make business sense, particularly in the case of a pre pack arrangement, where the assets and goodwill of a company is purchased by another company. These exceptions are:-

  • Where a business is acquired from a liquidating company as part of the insolvency process and relevant notices are served before the person does anything that would contravene section 216. The notices must be given to all known and ascertainable creditors and published in the London Gazette.
  • Where Court approval is obtained
  • In the case of group companies with similar names that are already trading, provided that they have been actively trading and using those names during the whole 12 month period prior to the liquidation.

How can this help you collect your debts?

Many creditors are now using the threat of section 216 as leverage to obtain payment, with a warning that the breach could be brought to the attention of the Insolvency Service. The ramifications are clearly severe and something that any director would be wise to avoid.

Shared information at industry credit circles is becoming more and more common as credit managers across the UK unite like Dumbledore’s Army to join forces against he who cannot (or at least should not) be named, and knowledge such as this is a useful weapon, particularly with serial offenders who show up time and time again. The ability to pursue them personally without the benefit of a personal guarantee, and to actually be able to put some weight behind that threat, is as useful as your trusty house-elf.

However, the legislation, loopholes and exceptions are complex and therefore a creditor would be wise to seek legal advice from an specialist legal advisor before embarking on litigation to pursue an action like this.

A valid threat coupled with asset information obtained from an enquiry agent or Land Registry searches, and clear evidence of the contravening acts obtained from company searches, could be the ingredients you need to cook up your own magic potion and say Alohomora to recovering your debt and Avada Kedavra to the pesky phoenix.

For more information, please contact us on 01332 226 474 or email: .

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