Losing money when a client or customer goes into liquidation is annoying enough. But when the individuals behind the insolvent company start trading again soon after, from the same premises and in the same line of business, questions will always arise as to whether company law is being abused.
The law recognises each individual company as being an independent entity. As long as it complies with the standard registration formalities, a new company is treated as having an existence of its own and has no responsibility for the debts that may have brought down other companies run by the same individual or individuals. So, annoying though it may be, there is nothing illegal in itself in the business of an insolvent company being effectively continued under the guise of a brand new company.
But there are remedies that unpaid creditors can explore. Under the Insolvency Act 1986, any person who has been a director (or shadow director) of a company may not, within 12 months of it entering into insolvent liquidation, become a director, or be in any way involved in the formation or management of another company that operates under the same or a similar name to the insolvent one.
A person who does so not only commits a criminal offence but also becomes personally liable for the debts of the ‘phoenix’ company that are run-up during the period of his or her involvement. The restriction applies for five years from the date of the first company’s liquidation.
The restriction applies in respect of both new companies and pre-existing companies – so if a pre-existing company has such a similar name as to suggest an association with the insolvent company, a director of the insolvent company may not be involved with it. And if a new or existing company continues to use a name that suggests an association with the insolvent company, a director still risks being caught.
These provisions take effect when the ‘phoenix’ company becomes insolvent and must be wound up. If the company can’t pay its debts, then the offending director or directors are personally liable on a joint and several basis. Such actions are becoming more and more common.
So if you find yourself in a situation where your insolvent debtor appears to have revived itself in some form or other, consider firstly whether the name of the new business is sufficiently similar to that used by the previous one as to suggest an obvious association. You can browse the online list of current and dissolved corporate names on the Companies House website, at www.companies-house.gov.uk.
You can then check if the individuals behind the insolvent company are formally involved with the ‘phoenix’ company.
If they are not formally involved, but operate behind the scenes, then this may not be so easy to establish. But if you can, the shadow directors and their ‘front men’ will both be liable on exactly the same basis.
John Davies is head of business law at ACCA.
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