Incurring an occasional bad debt when a customer becomes insolvent is a frustrating but regular part of business life.
However, that frustration can quickly grow if the directors of the insolvent company start up again using the same or a similar name as the failed business.
This phenomenon, known as the “phoenix” syndrome, was covered in the Insolvency Act 1986, which restricts the ability of directors of failed companies to re-use the company’s name where it has gone into insolvent liquidation.
It applies to individuals who have been directors or shadow directors of the insolvent company in the 12 months prior to it going into liquidation and prevents them from either re-using any registered or trading name by which the company was known during that period, or a name so similar as to suggest a link with that firm, for five years from when the old company went into liquidation.
This prevents the directors of the old company from not only being a director of a new company bearing or trading under a prohibited name, but also from being directly or indirectly involved in the management of a company or taking part in the carrying on of a business (otherwise than by a company) under a prohibited name.
Anyone contravening this rule can face both criminal and civil prosecution, and as well as committing an offence for which they could be be imprisoned or fined or both, they will also be personally liable for the debts of the new company incurred during the time when they are in breach of the rules.
Any other individuals involved in the management of the company and choosing to act on the instructions of such a disqualified person would also be jointly and severally liable for the debts of the new company incurred at that time.
There are, however, a number of important exceptions which will entitle a director of an insolvent company to act in a new business which bears the same or a similar name without contravening these rules, which are when:
These measures are designed to help prevent unscrupulous directors cashing in on what is left of the goodwill of the insolvent company and potentially misleading creditors, whilst at the same time not hampering genuine sales by properly regulated insolvency practitioners of the business of insolvent companies and their goodwill.
Providing creditors with proper notice that a new business has risen, phoenix-like, from the ashes of its predecessor helps ensure they can make an informed decision whether or not to trade with the new business and, if so, upon what terms.
This is a complex area of law, with each case needed to be resolved on its individual merits, and we would strongly advise that anyone facing this sort of situation takes qualified legal advice.
For more information on any of the above, or how we can help your business, please contact Neil Harrold, or call 0191 232 8345.