LEGAL EAGLE The fall - and rise - of phoenix companies

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When a company goes bust it is never a pleasant experience for those involved.

The lead-up to the liquidation of a company can be incredibly stressful and worrying for the directors and the liquidation itself can be a lengthy process with many issues along the way.

However, liquidating a failing company does give an opportunity for a fresh start. Once a company is dissolved it gives the owner-director a clean slate to start again with a new company.

Many people choose to go down this route to try and fix the errors of the previous venture and succeed where they had once failed.

Usually owner-directors will choose to trade under the same name as the previous company. This is commonly because even with its previous failures the name may still carry some goodwill or the company name may be based on a family name.

However, serious caution should be taken in doing this. Section 216 of the Insolvency Act 1986 prohibits the re-use of a company’s name (or a similar name) where the company has gone into insolvent liquidation. This is to stop rogue traders from piling up debt and then transferring the assets, premises, employees and alike to a new company leaving the debts of the old company behind.

The new company would therefore rise from the ashes of the old company and hence the common term “phoenix companies”.

The consequences of breaching s216 are severe and can be both criminal as well as civil.

A director found to be operating a phoenix company can be liable for any debts of the new company and could also receive a custodial sentence.

It is possible to re-use a company name provided the requisite procedures are followed.

It is therefore imperative to take legal advice following liquidation of a company to make sure the requirements are properly satisfied and a new company can be set up and ran properly.

We have a dedicated team of business specialists at Tilly Bailey & Irvine. Visit our website or more information on insolvency and other issues that can affect your business.