Can I Start a New Company After Liquidating Another?

The general answer is that you can be a director of as many companies as you like at the same time. However, if you have been the director of a liquidated company, and you set up a new company it cannot have the same or a similar name to the old company (a prohibited name). This is to reduce any confusion for creditors of the old company.

This is called passing off (under section 216 Insolvency Act 1986). It can lead to criminal action against the director, or being held liable for all of the debts of the new company if it goes into liquidation. So the best advice is to get professional advice.

The Law: What is Section 216?

Section 216 of the Insolvency Act 1986 applies to a person where a company (the liquidating company) has gone into insolvent liquidation. This section applies if you were a director or shadow director of the company at any time in the 12 months prior to liquidation. The section concerns the use of prohibited names.

A “prohibited name” is:

• The name used by the liquidating company within 12 months before its liquidation, or
• A name so similar to the liquidating company’s name as to suggest an association.

For five years following the liquidation, the person cannot (without court approval or other specific exceptions):

• Be a director of any company using a prohibited name.
• Participate, directly or indirectly, in the promotion, formation, or management of a company using a prohibited name.
• Be involved in any business (outside a company structure) using a prohibited name.

These restrictions apply specifically to cases of compulsory liquidation or other forms of insolvent liquidation.

Exceptions to the Restrictions

There are three exceptions to the above restrictions:

1. Acquisition of Assets by the New Company: If the new company acquires the whole or a substantial part of the insolvent company’s assets through an arrangement overseen by an insolvency practitioner, the name can be reused. However, a notice must be published in the London Gazette and creditors of the insolvent company must be informed.
2. Court Approval: The new company may seek “leave” (permission) from the court to reuse the prohibited name, provided the application for leave is made within seven days of the liquidation and is granted within six weeks.
3. Continuation of an Existing Name: If the new company has been operating under the same name for at least 12 months before the liquidation, it may continue to use that name.

Penalties for Breach

Violating these restrictions is a criminal offense and may result in imprisonment, a fine, or both.

Definitions and Scope

• “Company Name” includes any name under which the company operated or carried on business.
• “Insolvent Liquidation” refers to liquidation where the company’s assets are insufficient to cover debts, liabilities, and winding-up costs.
• “Company” includes entities that may be wound up under relevant legislation.

The other problem with setting up a new company with a similar name is that it can result in bad feelings. Creditors may think that the directors are being disingenuous by using the same or similar name, even if it is all done by leave of the court.

Next Steps and Expert Advice

There is nothing to stop you from setting up a new company just because a previous one under your control has gone into liquidation. However, if HMRC was a large creditor and this was not the first time that one of your companies has gone into liquidation, they may insist on a VAT or PAYE deposit to protect their position.

Allowing creditors to initiate compulsory liquidation proceedings indicates to creditors and the liquidator that the directors have failed to act in the best interests of the creditors. Clearly, the regulators will be unimpressed too!

It should be borne in mind that if you were to buy the business you will need to pay a fair price. The business will have to have been valued by a chartered surveyor or asset valuer.

For professional advice on this complex issue, call us on 0800 9700539. We can talk you through the process, organize the legal paperwork, and begin proceedings.