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For some years Mrs Smith was a director of a company called ABC Construction Limited. Due to trading difficulties this company was placed into creditors' voluntary liquidation in August 1999. Unfortunately it would appear that the director was not warned by the company's liquidator about the
provisions of Section 216. In April 1999 just four months prior to the winding up she formed a new company called Off The Shelf Limited which traded as ABC
Construction. That company continued to trade until March 2004 when it was also placed into creditors' voluntary liquidation following instructions given to us by the director. It was during our pre- liquidation enquiries that we learned of the existence of the previous company and its subsequent liquidation.
Beware the Revenue & Customs!
In July 2005 HM Revenue & Customs wrote to the company's former director and stated that, as the companies had traded under very similar names, it appeared that they were trading in contravention of Section 216. The director was therefore personally liable for the debts of the subsequent company Off The Shelf Limited by virtue of Section 217 of the same Act. The Revenue has demanded repayment of just over £87,000 from the director personally.
From our reading of the situation this is a clear case where the director, in total ignorance of the legislation, committed an offence which may ultimately cost her dearly. It could result in the director being made bankrupt.
It should be noted that it is up to creditors to take action under these sections of the Insolvency Act and not the liquidator. This form of action is likely to become more common as clearly HM Revenue & Customs are going to be looking in much more detail at such cases in the future. All directors should be aware that, since the government departments have lost their status as preferential creditors with effect from 15 September 2003, they are looking at all possible ways to recover unpaid taxes.
This is a very potent weapon in the Revenue's armoury and directors of insolvent companies and their advisers must tread extremely warily before setting up a company with a similar name, or as in this case using a similar trading name.
Escape routes
There are escape clauses contained in the Insolvency Rules 1986 which state that there are three excepted cases:
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Where the successor company acquires the whole or substantially the whole of the business of an insolvent company under arrangements made by an insolvency practitioner acting as its liquidator, administrator, administrative receiver or a supervisor of a voluntary arrangement under the Act. |
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Where the director makes an application to court for leave to use a similar name. |
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Where the company referred to, although known by a prohibited name, has been known by that name for the whole period of 12 months ending with the day before that on which the liquidated company went into liquidation and has not at any time during that period been dormant.
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There are complicated rules as to procedure and timing in respect of all these cases and professional insolvency advice should be sort by anyone contemplating using a similar name.
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The names in this case have been changed to preserve anonymity. |
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