Section 216 of the Insolvency Act 1986 was introduced to strike down the “phoenix” phenomenon where the assets of a company (“Oldco”) would be sold to a new company with a similar name and owned by the same directors (“Newco”) at an undervalue at a time when Oldco owed substantial sums to unsecured creditors. Oldco then goes into liquidation with little prospect of unsecured creditors being paid. It is not often appreciated that a breach of this provision could lead to a director being personally liable for Newco’s debts.

The Law

A director or Shadow Director of Oldco in the period of 12 months prior to liquidation shall not within the period of 5 years from when Oldco went into liquidation be a director or be concerned or take part in the promotion, formation or management of a company or take part in the carrying on of a business under a prohibited name.

A prohibited name is a name by which Oldco was known in the 12 months prior to liquidation or a name, which is so similar as to suggest an association with Oldco.

Exceptions

As ever there are exceptions, for example if the Court’s permission to use the name is obtained, or notice is given to creditors when the business is sold.

Consequences

If a person acts in contravention of Section 216 they can be imprisoned or fined. However, and more significantly for those seeking to recover money from Newco and finding difficulties in doing so, a person could be personally responsible for the debts of Newco.

This potential for personal liability not only applies to the director/shadow director of Oldco but also applies to a person who is involved in the management of Newco and acts on the instruction of such a director/shadow director knowing that director/shadow director to be in breach of Section 216.