Section 216 director bans and reusing company names

Section 216 director bans and reusing company names

Are company directors always automatically banned from running another business with the same name?

It is true that company directors are automatically banned from running a business with the same name if they liquidate their company, however there are legal ways to sidestep the ban.

Section 216 (s216) of the Insolvency Act 1986 makes it  illegal for any person who was a director of a company at any point in the 12 months before that company went into liquidation to be involved in another company with the same or a similar name for a period of five years.

Legal Advice for Insolvency Practitioners

Frettens' insolvency guru, Malcolm Niekirk has been advising insolvency practitioners and keeping them out of trouble for three decades. In this article, he examines a technical area of insolvency law. 

If you are an Insolvency Practitioner looking for legal advice on section 216 and a director ban, please feel free to get in touch with Malcolm Niekirk, head of our specialist insolvency & restructuring team.

This is a technical area of the law and Malcolm will be happy to discuss it with you.

If you are a company director concerned with a director ban or the re-use of a company name, read on.

What this article covers: s216 FAQs

As we have said, this is a technical area of the law. You can skip to the relevant section by clicking on the links below:

When is a director banned from running a business with the same name?

Section 216: When is a business name banned?

How the Section 216 ban works

Can you ignore a section 216 ban?

Side stepping a section 216 Insolvency Act 1986 ban

When will a director be banned from running a business with the same name?

Restriction on re-use of company names

The ban will be in place automatically if:

(a)        You are a company director. 

and     

(b)       Your company goes into insolvent liquidation.

What is an insolvent liquidation?     

An insolvent liquidation is one in which the company cannot pay all its debts.  Insolvent liquidations are called ‘creditors voluntary liquidations’ (CVLs) or ‘compulsory liquidations’ or ‘winding up orders’.

What is the difference between a liquidation and an insolvent liquidation?          

A liquidation is different from an ‘administration’, or a ‘company voluntary arrangement’ (CVA).  The ban does not apply to them.  But a company can go into liquidation from one of those other procedures.  If that might happen to you, this would be a good time to plan to side-step the ban, if you need to do so.   

and    

(c) You acted as a director during the last 12 months before the liquidation started.         

“I don’t think this applies to me.  I ran the company for a while, because the director was sick.  But I never called myself a director and didn’t register at Companies House.”

“I don’t think this applies to me.  I became a director just to sign one document and I resigned the same day.”

Sorry.  It does.

It’s an automatic ban.  It always applies.  But there are legal ways to side-step it.

Section 216: When is a business name banned?

The business name is banned if:

  • The old company used it.
  • Your customers or suppliers are likely to recognise a link with its business.

“It’s just a trading name. It’s different from the name registered at Companies House.”

“It’s a franchise. The company doesn’t own the name, but all franchises have to use it.”

“It’s a product name, not a business name.”

In each case, the name is banned.

Using your own name as a company name

“It’s my own name. The old company was A B Jones Limited.  I’m going to trade personally, using my personal name, A B Jones.”

That’s fine. But using your own name may not be allowed if:

  • you’re letting a new company use it (because that’s not personal use), or if
  • you’re using it as part of the new name, and the whole new name shows a connection. 

So, ‘A B Jones Garage’ is risky if the old company was ‘Jones Motors Limited’.

How the section 216 automatic director ban works

You are breaking the law if:

If you are:

 

A director under an automatic ban (as described above)

 

And:

If you are also:

 

Director of another company (let’s call it the new company) – or…

 

Working in the new company’s management – or…

 

Setting up the new company – or…

 

Carrying on a business alone (as a sole trader) – or …

 

Carrying on a business with others (in partnership) – or …

 

Promoting a business (you might let somebody else run it).

 

And:

If that business:

 

Uses a banned name (in the new company or business).

 

And:

If that happens:

 

Any time within five years after the liquidation started.

 

(The ban ends automatically after five years.)

The ban applies whether you are ‘directly or indirectly’ involved.  This means that other ways to side-step the ban – other than the legal ones written into the legislation – probably won’t work.

Can you ignore a section 216 ban?

This is what might happen to you if you break the ban:

  • You could be prosecuted (and fined, or imprisoned, if convicted).
  • You could be prosecuted for disqualification as a company director.  You could then be put under a legal ban that’s even more wide-ranging than this one (and which could last for up to 15 years).  And you’d probably have to pay the prosecutor’s legal fees.
  • You will be personally liable for the new company’s debts.  So a creditor who has to take legal action to be paid would also be able to take legal action against you personally.  There are solicitors who do this for their clients.

Side-stepping a section 216 ban

There are four ways the law allows you to use the same business name, despite the ban.  They are:

  1. Administration (instead of liquidation)
  2. Use by a pre-existing company
  3. Permission, from a court
  4. Formal notices, after buying the business from an insolvency practitioner

Detailed rules apply to each of those.  Depending on your circumstances, you may be able to choose from more than one of them, or possibly none may apply to your individual situation.

Side-stepping section 216 ban with a company administration

This is not an option if your company is already in liquidation.  Perhaps you are already talking to an insolvency practitioner about putting your company into liquidation.  If so, talk to them about whether administration is an option for it.

Some administrations are closed by dissolving the company at the end of the process.  If you are a director of that company, the ban won’t apply to you.

Other administrations are closed by putting the company into liquidation.  The ban will apply to you – from the date the company goes into liquidation – if you are a director of that company.

In many administrations the administrator won’t know, at the start of the administration, which exit they will take.

Sometimes an administrator will sell the business to a new company the director has set up.  (We won’t go into the whys and wherefores of that here.)  Suppose you are in that situation.  If so, look closely at option 4 – sidestepping the ban by using the formal notice procedure.  It may make sense to do that if there is any possibility that the company may later go into liquidation.  Remember, companies in administration do quite often go through liquidation later.  You might not get much advance warning (if any) of that happening.

Side-stepping a section 216 ban by using a pre-existing company

The scope of this is quite limited. 

You don’t break the law if:

You are:

 

A director under an automatic ban (as described above)

 

And if:

The business:

 

Uses a banned name (in the new company or business).

 

And if:

Also:

 

 

It (the new company or business) started trading with that name more than 12 months before the old company went into liquidation.

 

And if:

Also:

 

 

It (the new company or business) has been trading without a break for at least 12 months before the old company went into liquidation.

This rule is designed for cases where:

  • there are two separate businesses with a similar name; and
  • one goes into liquidation; and
  • the director of that one starts work for the other (or continues in a pre-existing role).

The 12-month rule is to make sure that it’s used only in bona fide cases.

Side-stepping a section 216 ban with permission from the court

You need to think about these points:

  • The court won’t back-date any permission it gives you.  That means that you should ask for permission before you break the ban.
  • You will automatically get temporary permission, for a short time, pending the court hearing.  But only if you file the papers in court within seven business days after the company goes into liquidation.  That’s a strict time limit.  Miss it, and you don’t get that temporary permission.
  • You will have to show the court that the new business has paid a fair price to buy the right to use the name from the old company.
  • You will have to show the court that you’ve been open and honest with the old company’s creditors about what has happened.
  • There is no guarantee that the court will grant permission.  You need a fall-back plan in case you’re not allowed to use the name in the way you want.
  • With legal fees and court fees to pay, this can be quite expensive.

Side-stepping section 216 by following the formal notice procedure

For this you have to follow a strict sequence.  You have to do it in exactly this order, to make this loophole work.  If you do, the ban does not apply to you in the new company for which you use this procedure.  (You will still be banned from using the banned name in any other company.)

First:

 

The old company has to go into liquidation, administration or a company voluntary arrangement (CVA).

Next:

 

The new company has to send a formal notice to the old company’s creditors.

 

And:

 

The new company must also publish a statutory notice in the London Gazette.

 

And:

 

The company must do both of those before (or within 28 days after it buys the business).

After that:

 

The new company has to buy most of the business from the liquidator, administrator or CVA supervisor.

And only then:

 

You can work in the new company as a director, and it can use the banned name in its business.

This is important.  Don’t break the ban before then – or this procedure won’t release you from the ban.  That doesn’t just mean you have a risk for what you were doing before you sent the notices out.  It means that sending the notices might be a complete waste of time and money and they might not have any legal effect.

The company can buy the business before it sends the notices to creditors (and publishes it in the London Gazette).  But, having bought it, it can’t (before sending and publishing the notices):

  • Use the banned name in any way if you are involved in the business; or
  • Let you get involved in the business, if it is using the banned name.

Advice from Frettens’ Insolvency Guru

Malcolm has some three decades of experience in insolvency and is regarded as one of the leading practitioners on the south coast.

Having spent time as a practising solicitor and partner, heading the insolvency teams at two large regional firms, Malcolm set up his own consultancy in 2016. He has spent the last four years working as the ‘Insolvency Guru’ keeping insolvency practitioners out of trouble, offering advice on specific cases and generally.

Malcolm Niekirk’s advice on section 216 bans

Don’t:

 

Break the ban before you send the notices to creditors (and publish it in the London Gazette).

This means:

 

The company can use the banned name before then – but you can’t be involved with it in any way.

Or:

 

You can be involved with the new company before then – but only if it is not using the banned name.

And:

 

You can’t send the notice to creditors (or publish it in the London Gazette) before the old company goes into liquidation.

Insolvency & Restructuring Solicitors near London, in Hampshire & Dorset, near Southampton and in Bournemouth, Poole, Christchurch and The New Forest

We hope you found this article useful. If you are an insolvency practitioner who would like to discuss section 216, please do not hesitate to get in touch.

If you are a director affected by the topics we have covered, or are considering some of the processes outlined, you will need to speak to a good Insolvency practitioner. Malcolm and the team have many contacts and will be happy to refer you to a suitable one.