Clarity provided on what debts a director or individual involved in a company using a ‘prohibited name’ could be liable for under sections 216 and 217 of the Insolvency Act 1986.

Who will be interested in this article?

Anyone who was, within 12 months of a company which has entered administration or liquidation (BustCo), a director of BustCo and who wants to be (or is) a director of or who is, in any way, concerned with or is taking part in the promotion, formation or management of another company which is using, or intends to use, a ‘prohibited name’.

A ‘prohibited name’ is defined under section 216 of the Insolvency Act 1986 as being either:

•  The name which BustCo was known by at any point during the 12 months before it entered administration or liquidation; or
•  It is a name which is so similar to BustCo’s name as to suggest an association with BustCo.

 

Why is this article of interest?

It explains what the limitations are on such a person who wants to be involved in a company using a ‘prohibited name’ and what the potential consequences are for that individual if they breach those restrictions.

 

What are the restrictions under section 216 of the Insolvency Act?

Under section 216, any person described above who is wanting to do any of the activities described above in a company which is using a ‘prohibited name’ is prevented from acting in such a way for five (5) years (starting from when BustCo entered administration/liquidation) unless they can benefit from one of three exemptions.

The exemptions, in summary, are:

1.  Where the company wanting to use the ‘prohibited name’ is proposing to carry on the whole or substantially the whole of BustCo’s business and purchases it from BustCo’s liquidator or administrator and the individual concerned gives prior notice to BustCo’s creditors and also publishes a notice in the London Gazette.
2. Applying to court for permission to be involved in the company using the ‘prohibited name’. 
3. If the company wanting to use the ‘prohibited name’ has already been known by that name for 12 months before BustCo entered administration or liquidation and hasn’t been dormant at any point during that time.

There are strict time limits to which exemptions (1) and (2) above are subject and must be complied with.

 

What are the consequences for breaching those restrictions?

If an individual does act either as director or in any way with the promotion, formation or management of a company using a ‘prohibited name’ and they cannot benefit from any of the 3 exemptions, then that person will be personally liable for all ‘relevant debts’ of that company under section 217 of the Insolvency Act 1986.

What’s more, that individual will be held jointly and severally liable with the company who is primarily responsible for those debts and any other individual who has breached the restrictions set out under section 216.

Section 216 does also provide anyone breaching the restriction could be liable for a term of imprisonment, or an additional fine, or both.

 

Liability under section 217 of the Insolvency Act 1986

‘Relevant debts’ of a company using a prohibited name are essentially all debts and liabilities of that company which are incurred at the time when a person was involved in the management of the company in breach of section 216 (or was acting on the instructions of someone who was managing the company in breach of section 216).

These liabilities could potentially be very significant, particularly when you factor in that liability for those debts is joint and several.

The case of PSV 1982 Limited serves as a useful illustration of what debts an individual breaching section 216 could be liable to face.

A Mr Langdon was a director of two companies; Discovery Yachts Limited (DYL) and Discovery Yachts Group Limited (DYGL).

DYL entered liquidation.

DYGL began to use a ‘prohibited name’, after DYGL had entered into a contract with a third party, a Mr France, but before it breached the terms of that contract.

Mr Langdon accepted that he was in breach of section 216 given his involvement with both DYL and DYGL and that none of the exemptions set out above were available to him.

Mr France commenced proceedings against DYGL for breach of contract but before trial, DYGL entered administration. DYGL did not participate further in proceedings and Mr France obtained judgement against DYGL for damages following its breach of contract for £1,125,824.67.

Mr France then assigned the benefit of the judgement to PSV, who commenced subsequent proceedings against Mr Langdon under section 217 of the Insolvency Act 1986 for the judgement liability.

Mr Langdon defended the action on the grounds that (1) he denied DYGL was even liable for the breach of contract and (2) he denied the judgement was a ‘relevant debt’ because DYGL’s liability arose at the time when it entered the contract with Mr France and at which point DYGL was not using a ‘prohibited name’.

Dealing with the first of those two points, the Court of Appeal held that individuals involved in the company using a ‘prohibited name’ cannot contest the liability of that company where judgement has already been obtained against it. Here, Mr Langdon was not a party to the proceedings against DYGL but this was not considered relevant by the court. He should have caused DYGL to defend the action (or have joined the proceedings himself to defend the claim) or have applied to court to set aside the judgement. In this case, he did none of these things.

On the second point the court held that it did not matter that DYGL wasn’t using a ‘prohibited name’ at the time it entered the contract with Mr France. What was relevant was that it was using a ‘prohibited name’ at the time when it breached the contract, as this was the point in time when DYGL’s liability for damages arose.

 

Conclusion

We would recommend directors or those individuals wanting to be involved in a company that wants to use a ‘prohibited name’ to contact us so we can advise on what exemptions may be available to them so as to avoid becoming jointly and severally liable for debts of the company using the ‘prohibited name’ going forward.

 

PSV 1982 Limited v Langdon [2022] EWCA Civ 1319